• 2002 General and Financial Information (Proxy Appendix)

APPENDIX

CATERPILLAR INC.

GENERAL AND FINANCIAL INFORMATION

2002

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TABLE OF CONTENTS

Page

Report of Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-3

Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-3

Consolidated Financial Statements and Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-4

Five-year Financial Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-31

Management’s Discussion and Analysis (MD&A)

Fourth Quarter 2002 Compared with Fourth Quarter 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-32

Machinery and Engines Sales by Geographic Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-34

2002 Compared with 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-34

Supplemental Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-36

2001 Compared with 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-37

Liquidity & Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-38

Critical Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-39

Employment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-39

Other Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-40

Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-42

Supplemental Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-44

Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-45

The management of Caterpillar Inc. has prepared the accompany-ing financial statements for the years ended December 31, 2002,2001 and 2000, and is responsible for their integrity and objec-tivity. The statements were prepared in conformity with generallyaccepted accounting principles, applying certain estimates andjudgments as required.

Management maintains a system of internal accounting controlswhich has been designed to provide reasonable assurance that:transactions are executed in accordance with proper authorization,transactions are properly recorded and summarized to producereliable financial records and reports, assets are safeguarded andthe accountability for assets is maintained.

The system of internal controls includes statements of policiesand business practices, widely communicated to employees,which are designed to require them to maintain high ethical stan-dards in their conduct of company affairs. The internal controlsare augmented by careful selection and training of supervisoryand other management personnel, by organizational arrange-ments that provide for appropriate delegation of authority anddivision of responsibility and by an extensive program of inter-nal audit with management follow-up. The company’s adoptionof 6 Sigma is expected to improve processes leading to enhancedinternal controls.

T h e f i n a n c i a l s t a t e m e n t s h a v e b e e n a u d i t e d b yPricewaterhouseCoopers LLP, independent accountants, inaccordance with auditing standards generally accepted in theUnited States of America. They have made similar annual auditssince the initial incorporation of our company. Their role is torender an objective, independent opinion on management’s finan-cial statements. Their report appears below.

Through its Audit Committee, the board of directors reviewsour financial and accounting policies, practices and reports. TheAudit Committee consists exclusively of seven directors whoare not salaried employees and who are, in the opinion of theboard of directors, free from any relationship that would inter-fere with the exercise of independent judgment as a committeemember. The Audit Committee meets several times each yearwith representatives of management, including the internal audit-ing department and the independent accountants to review theactivities of each and satisfy itself that each is properly discharg-ing its responsibilities. Both the independent accountants andthe internal auditors have free access to the Audit Committeeand meet with it periodically, with and without management rep-resentatives in attendance, to discuss, among other things, theiropinions as to the adequacy of internal controls and to reviewthe quality of financial reporting.

Chairman of the Board

Chief Financial Officer

January 23, 2003

REPORT OF MANAGEMENT Caterpillar Inc.

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REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF CATERPILLAR INC.:

In our opinion, the accompanying statements of consolidated financial position and the related statements of consolidated results ofoperations, changes in consolidated stockholders’ equity and consolidated cash flows present fairly, in all material respects, the finan-cial position of Caterpillar Inc. and its subsidiaries at December 31, 2002, 2001 and 2000, and the results of their operations and theircash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generallyaccepted in the United States of America. These financial statements are the responsibility of the Company’s management; our respon-sibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements inaccordance with auditing standards generally accepted in the United States of America, which require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes exam-ining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting princi-ples used and significant estimates made by management and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

As discussed in Note 9 to the consolidated financial statements, effective January 1, 2002 the Company changed the manner inwhich it accounts for goodwill and other intangible assets upon the adoption of Statement of Financial Accounting Standards No. 142“Goodwill and Other Intangible Assets.”

Peoria, Illinois

January 23, 2003

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2002 2001 2000________ _______ _______Sales and revenues:

Sales of Machinery and Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,648 $19,027 $18,913Revenues of Financial Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,504 1,423 1,262________ _______ _______

Total sales and revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,152 20,450 20,175

Operating costs:Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,709 14,752 14,497Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,531 2,567 2,367Research and development expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 656 696 649Interest expense of Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521 657 688Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 416 467 237________ _______ _______

Total operating costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,833 19,139 18,438________ _______ _______

Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,319 1,311 1,737

Interest expense excluding Financial Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 279 285 292Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 143 83________ _______ _______

Consolidated profit before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,114 1,169 1,528Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 367 447________ _______ _______Profit of consolidated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 802 802 1,081

Equity in profit (loss) of unconsolidated affiliated companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) 3 (28)________ _______ _______Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 798 $ 805 $ 1,053________ _______ _______________ _______ _______

Profit per common share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.32 $ 2.35 $ 3.04Profit per common share — diluted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.30 $ 2.32 $ 3.02Weighted-average common shares (millions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344.0 343.3 346.8Weighted-average common shares — diluted (millions)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346.9 347.1 348.9Cash dividends declared per common share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.400 $ 1.390 $ 1.345

(1) Diluted by assumed exercise of stock options, using the treasury stock method.

STATEMENT 1Consolidated Results of Operations for the Years Ended December 31(Dollars in millions except per share data)

See accompanying Notes to Consolidated Financial Statements.

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STATEMENT 2 Caterpillar Inc.Changes in Consolidated Stockholders’ Equity for the Years Ended December 31(Dollars in millions)

2002 2001 2000________________ _______________ _______________Common stock:

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,043 $ 1,048 $ 1,045Shares issued from treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (5) 3_______ ______ ______Balance at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,034 1,043 1,048_______ ______ ______

Treasury stock:Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,696) $(2,676) $(2,275)Shares issued: 2002 — 878,623; 2001 — 916,634; 2000 — 408,629 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 23 11Treasury shares purchased: 2001 — 937,000; 2000 — 10,789,700 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (43) (412)_______ ______ ______Balance at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,669) (2,696) (2,676)_______ ______ ______

Profit employed in the business:Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,533 7,205 6,617Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 798 $ 798 805 $ 805 1,053 $1,053Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (482) (477) (465)_______ ______ ______Balance at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,849 7,533 7,205_______ ______ ______

Accumulated other comprehensive income:Foreign currency translation adjustment:

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) 55 125Aggregate adjustment for year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 103 (72) (72) (70) (70)_______ ______ ______Balance at year-end. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 (17) 55_______ ______ ______

Minimum pension liability adjustment — consolidated companies:Balance at beginning of year (net of tax of: 2002 — $82; 2001 — $1; 2000 — $1) . . . . . . . . . . . . . . . (161) (1) (2)Aggregate adjustment for year (net of tax of: 2002 — $301; 2001 — $81; 2000 — $0) . . . . . . . . . . (610) (610) (160) (160) 1 1_______ ______ ______Balance at year-end (net of tax of: 2002 — $383; 2001 — $82; 2000 — $1) . . . . . . . . . . . . . . . . . . . . . . (771) (161) (1)_______ ______ ______

Minimum pension liability adjustment — unconsolidated affiliates:Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41) (31) (45)Aggregate adjustment for year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4 (10) (10) 14 14_______ ______ ______Balance at year-end. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) (41) (31)_______ ______ ______

Derivative financial instruments:Balance at beginning of year (net of tax of: 2002 — $17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26) — —Gains/(losses) deferred during year (net of tax of: 2002 — $10; 2001 — $24) . . . . . . . . . . . . . . . . . . . . 15 15 (39) (39) — —(Gains)/losses reclassified to earnings during year (net of tax of: 2002 — $11; 2001 — $7) . . . . . 22 22 13 13 — —_______ ______ ______Balance at year-end (net of tax of: 2002 — $4; 2001 — $17) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (26) —_______ ______ ______

Available-for-sale securities:Balance at beginning of year (net of tax of: 2002 — $13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24) — —Gains/(losses) deferred during year (net of tax of: 2002 — $16; 2001 — $14) . . . . . . . . . . . . . . . . . . . . (29) (29) (26) (26) — —(Gains)/losses reclassified to earnings during year (net of tax of: 2002 — $12; 2001 — $1) . . . . . 22 22 2 2 — —_______ ______ ______ ______ ______ ______Balance at year-end (net of tax of: 2002 — $17; 2001 — $13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31) (24) —_______ ______ ______

Total accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (742) (269) 23_______ ______ ______Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325 $ 513 $ 998______ ______ ____________ ______ ______

Stockholders’ equity at year-end. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,472 $ 5,611 $ 5,600_______ ______ _____________ ______ ______


2002 2001 2000________ _______ _______Assets

Current assets:Cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309 $ 400 $ 334Receivables — trade and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,838 2,592 2,608Receivables — finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,748 5,849 5,471Deferred and refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 642 423 397Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,328 1,211 1,019Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,763 2,925 2,692________ _______ _______

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,628 13,400 12,521Property, plant and equipment — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,046 6,603 5,951Long-term receivables — trade and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 55 76Long-term receivables — finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,714 6,267 6,095Investments in unconsolidated affiliated companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747 787 551Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850 938 907Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 274 61Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,402 1,397 1,446Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,117 936 856________ _______ _______

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,851 $30,657 $28,464________ _______ _______________ _______ _______

LiabilitiesCurrent liabilities:

Short-term borrowings:— Machinery and Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64 $ 219 $ 369— Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,111 1,961 602

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,269 2,123 2,339Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,620 1,419 1,148Accrued wages, salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,178 1,292 1,274Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 120 117Deferred and current income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 11 57Long-term debt due within one year:

— Machinery and Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 73 204— Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,654 3,058 2,558________ _______ _______

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,344 10,276 8,668Long-term debt due after one year:

— Machinery and Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,403 3,492 2,854— Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,193 7,799 8,480

Liability for postemployment benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,038 3,103 2,514Deferred income taxes and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 376 348________ _______ _______

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,379 25,046 22,864________ _______ _______

Contingencies (Note 21)Stockholders’ equity

Common stock of $1.00 par value:Authorized shares: 900,000,000Issued shares (2002, 2001 and 2000 — 407,447,312) at paid-in amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,034 1,043 1,048

Treasury stock (2002 — 63,192,245 shares; 2001 — 64,070,868 shares; and 2000 — 64,050,502 shares) at cost. . . . . . . . . . . . . . . (2,669) (2,696) (2,676)Profit employed in the business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,849 7,533 7,205Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (742) (269) 23________ _______ _______

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,472 5,611 5,600________ _______ _______

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,851 $30,657 $28,464________ _______ _______________ _______ _______

STATEMENT 3Consolidated Financial Position at December 31(Dollars in millions)

A-6


2002 2001 2000________ _______ _______Cash flow from operating activities:

Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 798 $ 805 $ 1,053Adjustments for non-cash items:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,220 1,169 1,063Unusual charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 153 —Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 344 79

Changes in assets and liabilities:Receivables — trade and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50) 99 (327)Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 (211) (54)Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 (160) 335Other — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (234) (212) (90)________ _______ _______

Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,366 1,987 2,059________ _______ _______

Cash flow from investing activities:Capital expenditures — excluding equipment leased to others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (728) (1,100) (928)Expenditures for equipment leased to others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,045) (868) (665)Proceeds from disposals of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561 356 263Additions to finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,338) (16,284) (14,879)Collections of finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,866 12,367 10,336Proceeds from sale of finance receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,310 3,079 3,346Investments and acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (294) (405) (115)Other — net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40) (72) (111)________ _______ _______

Net cash used for investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,708) (2,927) (2,753)________ _______ _______

Cash flow from financing activities:Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (481) (474) (462)Common stock issued, including treasury shares reissued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6 4Treasury shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (43) (412)Proceeds from long-term debt issued:

— Machinery and Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 681 12— Financial Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,889 3,381 3,748

Payments on long-term debt:— Machinery and Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (225) (354) (198)— Financial Products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,114) (2,599) (2,949)

Short-term borrowings — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (102) 420 800________ _______ _______Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 1,018 543________ _______ _______Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (12) (63)________ _______ _______Increase (decrease) in cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (91) 66 (214)Cash and short-term investments at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 334 548________ _______ _______

Cash and short-term investments at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309 $ 400 $ 334________ _______ _______________ _______ _______

All short-term investments, which consist primarily of highly liquid investments with original maturities of three months or less, are considered to be cash equivalents.

STATEMENT 4 Caterpillar Inc.Consolidated Statement of Cash Flow for the Years Ended December 31(Millions of dollars)

A-7


1. Operations and summary ofsignificant accounting policies

A. Nature of operations

We operate in three principal lines of business:

(1) Machinery — design, manufacture and marketing of con-struction, mining, agricultural and forestry machinery — trackand wheel tractors, track and wheel loaders, pipelayers, motorgraders, wheel tractor-scrapers, track and wheel excavators,backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopichandlers, skid steer loaders and related parts.

(2) Engines — design, manufacture and marketing of enginesfor Caterpillar Machinery, electric power generation systems;on-highway vehicles and locomotives; marine, petroleum, construc-tion, industrial, agricultural and other applications; and relatedparts. Reciprocating engines meet power needs ranging from 5 toover 22,000 horsepower (4 to over 16 200 kilowatts). Turbinesrange from 1,600 to 19,500 horsepower (1 000 to 14 500 kilowatts).

(3) Financial Products — financing to customers and dealersfor the purchase and lease of Caterpillar and other equipment, aswell as some financing for Caterpillar sales to dealers. Financingplans include operating and finance leases, installment sale con-tracts, working capital loans and wholesale financing plans. Thedivision also provides various forms of insurance to customersand dealers to help support the purchase and lease of our equip-ment. This line of business consists primarily of Caterpillar FinancialServices Corporation (Cat Financial) and Caterpillar InsuranceHoldings, Inc. (Cat Insurance) and their subsidiaries.

Our Machinery and Engines operations are highly integrated.Throughout the Notes, Machinery and Engines represents theaggregate total of these principal lines of business.

Our products are sold primarily under the brands “Caterpillar,”“Cat,” “Solar,” “MaK,” “Perkins,” “FG Wilson” and “Olympian.”

We conduct operations in our Machinery and Engines linesof business under highly competitive conditions, including intenseprice competition. We place great emphasis on the high qualityand performance of our products and our dealers’ service sup-port. Although no one competitor is believed to produce all of thesame types of machines and engines, there are numerous com-panies, large and small, which compete with us in the sale ofeach of our products.

Machines are distributed principally through a worldwide orga-nization of dealers (dealer network), 59 located in the United Statesand 156 located outside the United States. Worldwide, thesedealers serve 180 countries and operate 2,888 places of business,including 1,276 dealer rental outlets. Reciprocating engines aresold principally through the worldwide dealer organization andto other manufacturers for use in products manufactured by them.Some of the reciprocating engines manufactured by Perkins arealso sold through their worldwide network of 164 distributorslocated in 140 countries. Some of the electric power generationssystems manufactured by FG Wilson are sold through theirworldwide network of 250 dealers located in 170 countries. Ourdealers do not deal exclusively with our products; however, inmost cases sales and servicing of our products are our dealers’principal business. Turbines and large marine reciprocatingengines are sold through sales forces employed by Solar and

MaK, respectively. Occasionally, these employees are assistedby independent sales representatives.

Manufacturing activities of the Machinery and Engines linesof business are conducted in 45 plants in the United States; ninein the United Kingdom; eight in Italy; five in Mexico; four eachin China and India; three each in France and Northern Ireland;two each in Australia, Canada, Germany and Japan; and one eachin Belgium, Brazil, Hungary, Indonesia, The Netherlands, Poland,Russia, South Africa and Sweden. 14 parts distribution centersare located in the United States and 12 are located outside theUnited States.

The Financial Products line of business also conducts oper-ations under highly competitive conditions. Financing for usersof Caterpillar products is available through a variety of compet-itive sources, principally commercial banks and finance and leas-ing companies. We emphasize prompt and responsive service tomeet customer requirements and offer various financing plansdesigned to increase the opportunity for sales of our productsand generate financing income for our company. FinancialProducts activity is conducted primarily in the United States,with additional offices in Asia, Australia, Canada, Europe andLatin America.

B. Basis of consolidation

The financial statements include the accounts of Caterpillar Inc.and its subsidiaries. Investments in companies that are owned20% to 50% or are less than 20% owned and for which we havesignificant influence are accounted for by the equity method (seeNote 8 on Page A-14).

Certain amounts for prior years have been reclassified to con-form with the current-year financial statement presentation. Inaddition, a new line (“Other operating expenses”) was added tothe Statement of Results of Operations in 2001. Financial Productsdepreciation expense on equipment leased to others is reportedon the new line. Such expenses previously were included in“Selling, general and administrative expenses.”

C. Sales and revenue recognition

Sales of Machinery and Engines are recognized when title trans-fers and the risks and rewards of ownership have passed to cus-tomers or independently owned and operated dealers.

Revenues of Financial Products represent primarily financeand lease revenues of Cat Financial, a wholly owned subsidiary.Finance revenues are recognized over the term of the contractat a constant rate of return on the scheduled uncollected principalbalance. Lease revenues are recognized in the period earned.Recognition of income is suspended when collection of futureincome is not probable. Accrual is resumed, and previously sus-pended income is recognized, when the receivable becomes con-tractually current and collection doubts are removed.

D. Inventories

Inventories are stated at the lower of cost or market. Cost is prin-cipally determined using the last-in, first-out (LIFO) method.The value of inventories on the LIFO basis represented about80% of total inventories at December 31, 2002, 2001 and 2000.

If the FIFO (first-in, first-out) method had been in use, inven-tories would have been $1,977, $1,923 and $2,065 higher thanreported at December 31, 2002, 2001 and 2000, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in millions except per share data)

A-8

Caterpillar Inc.

A-9

E. Securitized receivablesWhen finance receivables are securitized, we retain interest inthe receivables in the form of interest-only strips, servicing rights,cash reserve accounts and subordinate certificates. Gains orlosses on the securitization are dependent on the purchase pricebeing allocated between the carrying value of the securitizedreceivables and the retained interests based on their relative fairvalue. We estimate fair value based on the present value of futureexpected cash flows using key assumptions for credit losses, pre-payment speeds, forward yield curves and discount rates (seeNote 5 on Pages A-12 – A-14).

F. Depreciation and amortizationDepreciation of plant and equipment is computed principallyusing accelerated methods. Amortization of purchased intangi-bles is computed using the straight-line method, generally overa period of 15 years or less. Accumulated amortization was $47,$32 and $21 at December 31, 2002, 2001 and 2000, respectively.

G. Shipping and handling costsWe include shipping and handling (including warehousing) costsincurred in connection with the distribution of replacement partsin the “Selling, general and administrative expenses” line ofStatement 1. These amounts were $244, $241 and $235 for theyears ended December 31, 2002, 2001 and 2000, respectively.

H. Foreign currency translationThe functional currency for most of our Machinery and Enginesconsolidated companies is the U.S. dollar. The functional currencyfor most of our Financial Products and equity basis companies isthe respective local currency. Gains and losses resulting from thetranslation of foreign currency amounts to the functional currencyare included in “Other income (expense)” in Statement 1. Gainsand losses resulting from translating assets and liabilities from thefunctional currency to U.S. dollars are included in “Accumulatedother comprehensive income.”

I. Derivative financial instrumentsOur earnings and cash flow are subject to fluctuations due to changesin foreign currency exchange rates, interest rates and commodityprices. Our Risk Management Policy (Policy) allows for the useof derivative financial instruments to prudently manage foreigncurrency exchange rate, interest rate and commodity price expo-sure. Our Policy specifies that derivatives are not to be used forspeculative purposes. Derivatives that we use are primarily for-eign currency forward and option contracts, interest rate swapsand commodity forward and option contracts. Our derivativeactivities are subject to the management, direction and control ofour financial officers. Risk management practices, including theuse of financial derivative instruments, are presented to the AuditCommittee of the board of directors at least annually.

All derivatives are recognized on the balance sheet at theirfair value. On the date the derivative contract is entered, we desig-nate the derivative as (1) a hedge of the fair value of a recognizedliability (“fair value” hedge), (2) a hedge of a forecasted trans-action or the variability of cash flow to be paid (“cash flow”hedge), or (3) an “undesignated” instrument. Changes in the fairvalue of a derivative that is qualified, designated and highlyeffective as a fair value hedge, along with the gain or loss on thehedged liability that is attributable to the hedged risk, are recordedin current earnings. Changes in the fair value of a derivative thatis qualified, designated and highly effective as a cash flow hedge

are recorded in other comprehensive income until earnings areaffected by the forecasted transaction or the variability of cashflow and are then reported in current earnings. Changes in the fairvalue of undesignated derivative instruments and the ineffectiveportion of designated derivative instruments are reported in cur-rent earnings.

We formally document all relationships between hedginginstruments and hedged items, as well as the risk-managementobjective and strategy for undertaking various hedge transac-tions. This process includes linking all derivatives that are des-ignated as fair value hedges to specific liabilities on the balancesheet and linking cash flow hedges to specific forecasted trans-actions or variability of cash flow.

We also formally assess, both at the hedge’s inception and onan ongoing basis, whether the derivatives that are used in hedg-ing transactions are highly effective in offsetting changes in fairvalues or cash flow of hedged items. When it is determined thata derivative is not highly effective as a hedge or that it has ceasedto be a highly effective hedge, we discontinue hedge account-ing prospectively, in accordance with Statement of FinancialAccounting Standards No. 133 (SFAS 133). Please refer to Note 2on Pages A-10 and A-11 for more information on derivatives.

J. Estimates in financial statements

The preparation of financial statements in conformity with account-ing principles generally accepted in the United States of Americarequires management to make estimates and assumptions thataffect reported amounts. The more significant estimates include:residual values for leased assets, fair market values for goodwillimpairment tests, impairment of available-for-sale securities, andreserves for warranty, product liability and insurance losses,postemployment benefits, post-sale discounts, credit losses andcertain unusual charges.

K. Accounting changes

In June 2001, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 143 (SFAS 143),“Accounting for Asset Retirement Obligations.” SFAS 143addresses financial accounting and reporting for obligations asso-ciated with the retirement of tangible, long-lived assets and theassociated asset retirement costs. This Statement requires thatthe fair value of a liability for an asset retirement obligation berecognized in the period in which it is incurred by capitalizingit as part of the carrying amount of the long-lived assets. Asrequired by SFAS 143, we will adopt this new accounting stan-dard on January 1, 2003. We believe the adoption of SFAS 143will not have a material impact on our financial statements.

In June 2002, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 146 (SFAS 146),“Accounting for Costs Associated with Exit or Disposal Activities.”SFAS 146 nullifies the guidance of the Emerging Issues TaskForce (EITF) Issue No. 94-3, Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit anActivity (including Certain Costs Incurred in a Restructuring).SFAS 146 requires that a liability for a cost associated with anexit or disposal activity be recognized when the liability isincurred. SFAS 146 also establishes that fair value is the objec-tive for the initial measurement of the liability. The provisionsof SFAS 146 are required for exit or disposal activities that areinitiated after December 31, 2002. We adopted SFAS 146 on

NOTES continued

(Dollars in millions except per share data)

A-10

October 1, 2002. Its adoption did not have any impact on ourfinancial statements.

In October 2002, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards No. 147(SFAS 147), “Acquisitions of Certain Financial Institutions.”SFAS 147 requires that the guidance provided by SFAS 141“Business Combinations,” SFAS 142 “Goodwill and Other Intan-gible Assets” and SFAS 144 “Accounting for the Impairment orDisposal of Long-Lived Assets” will apply to acquisitions offinancial institutions (previously covered under special industryguidance). The transition provisions of SFAS 147 were effec-tive on October 1, 2002. The adoption of SFAS 147 did not haveany impact on our financial statements.

In November 2002, the Financial Accounting Standards Boardissued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Account-ing and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others.” FIN 45 elaborates on thedisclosures to be made by a guarantor about its obligations undercertain guarantees. It also clarifies that a guarantor is required torecognize, at the inception of a guarantee, a liability for the fair valueof the obligation undertaken in issuing the guarantee. As required byFIN 45, we adopted the disclosure requirements on December 31,2002 (refer to Note 20 on Page A-21), and we will adopt the initialrecognition and measurement provisions on a prospective basisfor guarantees issued or modified after December 31, 2002. Webelieve the adoption of the recognition/measurement provisionswill not have a material impact on our financial statements.

In December 2002, the Financial Accounting Standards Boardissued Statement of Financial Accounting Standards No. 148(SFAS 148), “Accounting for Stock-Based Compensation —Transition and Disclosure.” This Statement amends FASB State-ment No. 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for a voluntary change tothe fair value based method of accounting for stock-based employeecompensation. In addition, this Statement amends the disclosurerequirements of Statement 123 to require prominent disclosuresin both annual and interim financial statements about the methodof accounting for stock-based employee compensation and theeffect of the method used on reported results. We account forstock options using the intrinsic value method in accordance withAccounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees.” Therefore, no compensation expenseis recognized in association with our options. We adopted thedisclosure requirements of SFAS 148 in December 2002.Pro forma net income and earnings per share were:

Years ended December 31,

2002 2001 2000_____ _____ _____Net income, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 798 $ 805 $1,053Deduct: Total stock-based employee

compensation expense determined underfair value based method for all awards,net of related tax effects. . . . . . . . . . . . . . . . . . . . . . . . . . . (65) (57) (45)_____ _____ _____

Pro forma net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 733 $ 748 $1,008_____ _____ __________ _____ _____Profit per share of common stock:

As reported:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.32 $ 2.35 $ 3.04Assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.30 $ 2.32 $ 3.02

Pro forma:Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.13 $ 2.18 $ 2.91Assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.13 $ 2.17 $ 2.90

2. Derivative financial instrumentsand risk management

A. Adoption of SFAS 133We adopted SFAS 133, “Accounting for Derivative Instrumentsand Hedging Activities,” and Financial Accounting StandardsNo. 138 effective January 1, 2001. Adoption of these new account-ing standards resulted in cumulative after-tax reductions to profitand accumulated other comprehensive income of $2 and $12,respectively, in the first quarter of 2001. The adoption also imma-terially impacted both assets and liabilities recorded on the balancesheet. During 2002 and 2001, we reclassified $1 and $5 of thetransition adjustment from accumulated other comprehensiveincome to current earnings, respectively.

B. Foreign currency exchange rate riskForeign currency exchange rate movements create a degree ofrisk by affecting the U.S. dollar value of sales made and costsincurred in foreign currencies. Movements in foreign currencyrates also affect our competitive position as these changes mayaffect business practices and/or pricing strategies of non-U.S.-based competitors. Additionally, we have balance sheet positionsdenominated in foreign currency, thereby creating exposure tomovements in exchange rates.

Our Machinery and Engines operations purchase, manufac-ture and sell products in many locations around the world. Aswe have a diversified revenue and cost base, we manage our futureforeign currency cash flow exposure on a net basis. We use foreigncurrency forward and option contracts to manage unmatched for-eign currency cash inflow and outflow. Our objective is to mini-mize the risk of exchange rate movements that would reduce theU.S. dollar value of our foreign currency cash flow. Our Policyallows for managing anticipated foreign currency cash flow forup to four years.

We generally designate as cash flow hedges at inception ofthe contract any Australian dollar, Brazilian real, British pound,Canadian dollar, euro, Japanese yen, Mexican peso or Singaporedollar forward or option contracts that exceed 90 days in duration.Designation is performed on a specific exposure basis to sup-port hedge accounting. The remainder of Machinery and Enginesforeign currency contracts is undesignated. Losses of $.4 and $2on the undesignated contracts were recorded in current earnings[“Other income (expense)” in Statement 1] for 2002 and 2001,respectively. Gains/(losses) of $(.5) and $.3 due to changes in timeand volatility value on options were excluded from effective-ness calculations and included in current earnings [“Other income(expense)”] for 2002 and 2001, respectively. As of December 31,2002, $11 of deferred net gains included in equity (“Accumulatedother comprehensive income” in Statement 3) is expected to bereclassified to current earnings [“Other income (expense)”] overthe next 12 months. Last year, $5 of deferred net gains was expectedto be reclassified to current earnings. There were no circumstanceswhere hedge treatment was discontinued during 2002 or 2001.

In managing foreign currency risk for our Financial Productsoperations, our objective is to minimize earnings volatility resultingfrom conversion and the remeasurement of net foreign currencybalance sheet positions. Our Policy allows the use of foreign cur-rency forward contracts to offset the risk of currency mismatchbetween our receivable and debt portfolio. All such foreign cur-rency forward contracts are undesignated. “Other income (expense)”

includes gains/(losses) of $(96) and $43 on the undesignatedcontracts for 2002 and 2001, respectively, substantially offsetby balance sheet remeasurement and conversion gains and losses.

C. Interest rate risk

Interest rate movements create a degree of risk by affecting theamount of our interest payments and the value of our fixed ratedebt. Our Policy is to use interest rate swap agreements and for-ward rate agreements to manage our exposure to interest ratechanges and lower the cost of borrowed funds.

Our Machinery and Engines operations generally use fixedrate debt as a source of funding. Our objective is to minimizethe cost of borrowed funds. Our policy allows us to enter fixed-to-floating interest rate swaps and forward rate agreements tomeet that objective with the intent to designate as fair valuehedges at inception of the contract all fixed-to-floating interestrate swaps. Designation as a hedge of the fair value of our fixedrate debt is performed to support hedge accounting. In 2001 gainson undesignated contracts of $.3 were recorded in current earn-ings [“Other income (expense)”] for the year. In 2001 gains ondesignated interest rate derivatives of $23 were offset by losses onhedged debt of $18 in current earnings [“Other income (expense)”]for the year. During 2001, our Machinery and Engines operationsliquidated all fixed-to-floating interest rate swaps. Deferred gainson liquidated fixed-to-floating interest rate swaps, which werepreviously designated as fair value hedges, are being amortizedto earnings ratably over the remaining life of the hedged debt.Gains of $8 and $6 on the liquidated swaps were amortized tocurrent earnings [“Other income (expense)”] for 2002 and 2001,respectively. We designate as cash flow hedges at inception ofthe contract all forward rate agreements. Designation as a hedgeof the anticipated issuance of debt is performed to support hedgeaccounting. Machinery and Engines forward rate agreements are100% effective. As of December 31, 2002, $.3 of deferred net gainsincluded in equity (“Accumulated other comprehensive income”)is expected to be reclassified to current earnings [“Other income(expense)”] over the next 12 months. Last year, $.3 of deferred netgains was expected to be reclassified to current earnings. The reclas-sification of the remaining deferred gain to current earnings [“Otherincome (expense)”] will occur over a maximum of 30 years. Therewere no circumstances where hedge treatment was discontinuedduring 2002 or 2001.

Our Financial Products operations have a “match funding”objective whereby, within specified boundaries, the interest rateprofile (fixed rate or floating rate) of their debt portfolio largelymatches the interest rate profile of their receivable, or asset, port-folio. In connection with that objective, we use interest ratederivative instruments to modify the debt structure to match thereceivable portfolio. This “match funding” reduces the risk ofdeteriorating margins between interest-bearing assets and inter-est-bearing liabilities, regardless of which direction interest ratesmove. We also use these instruments to gain an economic and/orcompetitive advantage through a lower cost of borrowed funds.This is accomplished by changing the characteristics of existingdebt instruments or entering into new agreements in combinationwith the issuance of new debt.

Our Policy allows us to issue floating-to-fixed, fixed-to-floatingand floating-to-floating interest rate swaps to meet the “matchfunding” objective. We designate as fair value hedges, at inception

of the contract, all fixed-to-floating interest rate swaps. Designationas a hedge of the fair value of our fixed rate debt is performed tosupport hedge accounting. As Financial Products fixed-to-floatinginterest rate swaps are 100% effective, gains on designated inter-est rate derivatives of $17 and $44 were offset completely bylosses on hedged debt of $17 and $44 in current earnings [“Otherincome (expense)”] for 2002 and 2001, respectively. FinancialProducts policy is to designate as cash flow hedges, at inception ofthe contract, most floating-to-fixed interest rate swaps. Designationas a hedge of the variability of cash flow is performed to supporthedge accounting. Gains/(losses) of $.4 and $(1) due to ineffec-tiveness on floating-to-fixed interest rate swaps were includedin current earnings [“Other income (expense)”] for 2002 and2001, respectively. During the second quarter of 2002, we liq-uidated four fixed-to-floating interest rate swaps. Deferred gainson these swaps, which were previously designated as fair valuehedges, are being amortized to earnings ratably over the remain-ing life of the hedged debt. Gains of $1 were amortized to Interestexpense for the year ended December 31, 2002. As of December 31,2002, $26 of deferred net losses included in equity (“Accumulatedother comprehensive income”) is expected to be reclassified tocurrent earnings (“Interest expense of Financial Products” inStatement 1) over the next 12 months. Last year, $30 of deferrednet losses was expected to be reclassified to current earnings.There were no circumstances where hedge treatment was dis-continued during 2002 or 2001.

D. Commodity price riskCommodity price movements create a degree of risk by affect-ing the price we must pay for certain raw material. Our Policyis to use commodity forward and option contracts to manage thecommodity risk and reduce the cost of purchased materials.

Our Machinery and Engines operations purchase aluminum,copper and nickel embedded in the components we purchasefrom suppliers. Our suppliers pass on to us price changes in thecommodity portion of the component cost.

Our objective is to reduce the cost of purchased materials. OurPolicy allows us to enter commodity forward and option con-tracts to lock in the purchase price of the commodities within afour-year horizon. All such commodity forward and option con-tracts are undesignated. Gains/(losses) on the undesignated con-tracts of $.9 and $(8) were recorded in current earnings [“Otherincome (expense)”] for 2002 and 2001, respectively.

3. Other income (expense)Years ended December 31,

2002 2001 2000______ _____ _____Investment and interest income . . . . . . . . . . . . . . . . . $ 31 $ 96 $ 96Foreign exchange (losses) gains . . . . . . . . . . . . . . . . 13 (29) (78)Miscellaneous income . . . . . . . . . . . . . . . . . . . . . . . . . 30 76 65______ _____ _____

$ 74 $ 143 $ 83______ _____ ___________ _____ _____

4. Income taxes

The components of profit before taxes were:Years ended December 31,

2002 2001 2000______ _____ _____U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 343 $ 741 $1,083Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 771 428 445______ _____ _____

$1,114 $ 1,169 $1,528______ _____ ___________ _____ _____

Caterpillar Inc.

A-11

The components of the provision for income taxes were:Years ended December 31,

2002 2001 2000______ _____ _____Current tax provision:

U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (62) $ 150 $ 177Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 174 196State (U.S.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 11 14______ _____ _____

$ 149 $ 335 $ 387______ _____ _____Deferred tax provision (credit):

U.S. Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 65 83Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) (34) (35)State (U.S.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1 12______ _____ _____

163 32 60______ _____ _____Total provision for income taxes . . . . . . . . . . . . . . . . $ 312 $ 367 $ 447______ _____ ___________ _____ _____

Reconciliation of the U.S. federal statutory rate to effective rate:Years ended December 31,

2002 2001 2000______ _____ _____U.S. statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0 % 35.0 % 35.0 %(Decreases) increases in taxes resulting from:

Benefit of foreign sales corporation/extraterritorial income exclusion. . . . . . . . . . . . . (4.4)% (4.9)% (3.8)%

Release valuation allowance . . . . . . . . . . . . . . . . . . — — (2.6)%Non-U.S. subsidiaries taxed

at other than 35% . . . . . . . . . . . . . . . . . . . . . . . . . . (3.4)% (0.1)% 1.6 %Other — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8 % 1.4 % (0.8)%______ _____ _____

Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . 28.0 % 31.4 % 29.4 %______ _____ ___________ _____ _____We paid income taxes of $124, $379 and $359 in 2002, 2001

and 2000, respectively.We have recorded income tax expense at U.S. tax rates on all

profits, except for undistributed profits of non-U.S. companieswhich are considered permanently invested. Determination ofthe amount of unrecognized deferred tax liability related to per-manently invested profits is not feasible.

Deferred income tax assets and liabilities:December 31,

2002 2001 2000_____ _____ _____Deferred income tax assets:

Postemployment benefitsother than pensions . . . . . . . . . . . . . . . . . . . . . . . . $1,130 $ 1,112 $1,052

Warranty reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204 186 191Unrealized profit excluded

from inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219 212 176Net operating loss carryforwards . . . . . . . . . . . . . . 224 207 183Inventory valuation method . . . . . . . . . . . . . . . . . . . 60 50 67Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 — —Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 279 247_____ _____ _____

2,081 2,046 1,916_____ _____ _____Deferred income tax liabilities:

Capital assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (625) (523) (426)Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (182) (202)_____ _____ _____

(625) (705) (628)_____ _____ _____Valuation allowance for deferred tax assets . . . . . . (18) (22) (25)_____ _____ _____Deferred income taxes — net . . . . . . . . . . . . . . . . . . . $1,438 $ 1,319 $1,263_____ _____ __________ _____ _____

SFAS 109 requires that individual tax-paying entities of thecompany offset all current deferred tax liabilities and assetswithin each particular tax jurisdiction and present them as a sin-gle amount in the Statement of Financial Position. A similar pro-cedure is followed for all noncurrent deferred tax liabilities andassets. Amounts in different tax jurisdictions cannot be offset

against each other. The amount of deferred income taxes atDecember 31, included on the following lines in Statement 3,are as follows:

2002 2001 2000_____ _____ _____Assets:

Deferred and refundable income taxes . . . . . . . . . $ 638 $ 423 $ 397Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 850 938 907_____ _____ _____

$1,488 $ 1,361 $1,304Liabilities:

Deferred and current income taxes payable . . . . $ 8 $ 6 $ 6Deferred income taxes and other liabilities . . . . . 42 36 35_____ _____ _____

Deferred income taxes — net . . . . . . . . . . . . . . . . . . . $1,438 $ 1,319 $1,263______ _____ ___________ _____ _____

A valuation allowance has been recorded at certain non-U.S.subsidiaries that have not yet demonstrated consistent and/orsustainable profitability to support the recognition of net deferredtax assets.

In 2000, circumstances changed at our Brazilian subsidiarythat allowed us to reduce the valuation allowance and recognizeadditional net deferred income tax assets.

As of December 31, 2002, amounts and expiration dates ofnet operating loss carryforwards in various non-U.S. taxing juris-dictions were:

2003 2004 2005 2006 2007 2008 2009 Unlimited Total_____________________________________________________$4 $8 $12 $16 $11 $1 $51 $705 $808As of December 31, 2002, $89 of regular foreign tax credit

carryforwards were available in the United States. They willexpire in 2007.

5. Finance receivables

Finance receivables are receivables of Cat Financial, which gen-erally can be repaid or refinanced without penalty prior to contrac-tual maturity. Total finance receivables reported in Statement 3are net of an allowance for credit losses. The effective interestrate on these receivables is 7.1%.

Caterpillar Inc. utilizes inventory merchandising programs forits North American dealers. Certain dealer receivables, which arisefrom the sale of goods, are sold to Cat Financial at a discount.Some of these receivables are then securitized by Cat Financialinto private-placement, revolving securitization facilities. CatFinancial services the dealer receivables, which are held in asecuritization trust and receives an annual servicing fee of 1% ofthe average outstanding principle balance. Securitization ofreceivables is a cost-effective means of financing the business.Consolidated net discounts of $10, $24 and $38 were recognizedon securitization of dealer receivables during 2002, 2001 and 2000,respectively, and are included in “Other income (expense)” inStatement 1. Significant assumptions used to estimate the fairvalue of dealer receivables securitized during 2002, 2001 and2000 include a discount rate of 4.8%, 7.2% and 9.2%, respec-tively. These rates reflect declining market interest rates. Otherassumptions include a one-month weighted-average maturity, aweighted-average prepayment rate of 0% and expected creditlosses of 0% for 2002, 2001 and 2000. Expected credit lossesare assumed to be 0% because dealer receivables have histori-cally had no losses and none are expected in the future. The netdealer receivables retained were $1,145, $772 and $814 as ofDecember 31, 2002, 2001 and 2000, respectively, and are includedin “Receivables — finance” in Statement 3 and “Wholesale Notes”in Table I.

NOTES continued


A-12

During 2002 and 2001, Cat Financial securitized retail install-ment sale contracts and finance leases into public asset-backedsecuritization facilities. These finance receivables, which arebeing held in securitization trusts, are secured by new and usedequipment. Cat Financial retained servicing responsibilities andsubordinated interests related to these securitizations. For 2002,subordinated interests included $8 in subordinated certificates,an interest in certain future cash flows (excess) with an initialfair value of $11 and a reserve account with an initial fair valueof $10. For 2001, subordinated interests included $10 in subor-dinated certificates, an interest in certain future cash flows(excess) with an initial fair value of $20 and a reserve accountwith an initial fair value of $5. The company’s retained interestsgenerally are subordinate to the investors’ interests. Net gainsof $18 and $21 were recognized on these transactions in 2002and 2001, respectively.

Significant assumptions used to estimate the fair value of thesubordinated certificates were:

2002 2001_____ _____Discount rate ....................................................................... 4.8% 6.3%Weighted-average prepayment rate...................................... 14.0% 14.0%Expected credit losses ......................................................... 1.0% 0.6%

Significant assumptions used to estimate the fair value of theexcess and the reserve accounts were:

2002 2001_____ _____Discount rate ....................................................................... 14.0% 13.6%Weighted-average prepayment rate...................................... 14.0% 14.0%Expected credit losses ......................................................... 1.0% 0.6%

The company receives annual servicing fees of approximately1% of the unpaid note value.

During 2002, 2001 and 2000, Cat Financial serviced installmentsale contracts and finance lease contracts that they securitized.Cat Financial receives a servicing fee of 1% of the average out-standing principal balance. As of December 31, 2002, 2001 and2000, the subordinated retained interests in the public securiti-zations totaled $47, $51 and $61, respectively. Key assumptionsused to determine the fair value of the retained interests were:

2002 2001 2000_____ _____ _____Cash flow discount rates on

subordinated tranches...................... 4.8-6.3% 6.3-6.9% 6.3-6.9%Cash flow discount rates on other

retained interests.............................. 13.6-14.0% 13.6% 13.6%Weighted-average maturity ................. 29 months 27 months 16 monthsAverage prepayment rate..................... 14.0% 14.0% 14.0%Expected credit losses......................... 1.0% 0.5% 0.5%

The investors and the securitization trusts have no recourse toCat Financial’s other assets for failure of debtors to pay when due.

We estimated the impact of individual 10% and 20% changesto the key economic assumptions used to determine the fair valueof residual cash flow in retained interests on our income. Anindependent, adverse change to each key assumption had animmaterial impact on the fair value of residual cash flow.

The securitization facilities involved in Cat Financial’s secu-ritizations are qualifying special purpose entities and thus, inaccordance with the Statement of Financial Standards No. 140(SFAS 140), “Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities,” are not consolidated.

We consider an account past due if any portion of an install-ment is due and unpaid for more than 30 days. Recognition ofincome is suspended when management determines that collec-tion of future income is not probable (generally after 120 days

Caterpillar Inc.

A-13

TABLE I — Finance Receivables Information_______________________________________________________________________________________________________________

Continued on Page A-14

Contractual maturities of outstanding receivables:December 31, 2002

Wholesaleand Retail Wholesale

Installment Finance and RetailAmounts Due In Contracts Leases Notes Total____________ _______ ______ ______ ______2003 . . . . . . . . . . . . . . . . . . . . $ 1,642 $ 1,505 $ 3,181 $ 6,3282004 . . . . . . . . . . . . . . . . . . . . 1,063 1,051 973 3,0872005 . . . . . . . . . . . . . . . . . . . . 629 644 571 1,8442006 . . . . . . . . . . . . . . . . . . . . 274 303 361 9382007 . . . . . . . . . . . . . . . . . . . . 84 134 194 412Thereafter. . . . . . . . . . . . . . . . 25 157 717 899_____ _____ _____ ______

3,717 3,794 5,997 13,508Residual value . . . . . . . . . . . — 910 — 910Less: Unearned income . . . 240 479 30 749_____ _____ _____ ______Total . . . . . . . . . . . . . . . . . . . . $ 3,477 $ 4,225 $ 5,967 $ 13,669_____ _____ _____ ___________ _____ _____ ______Impaired loans and leases:

2002 2001 2000____ ____ ____Average recorded investment . . . . . . . . . . . . . . . . . . . $ 292 $ 323 $ 144____ ____ ________ ____ ____At December 31:

Recorded investment . . . . . . . . . . . . . . . . . . . . . . . . . $ 366 $ 259 $ 265Less: Fair value of underlying collateral. . . . . . . . 233 167 198____ ____ ____

Potential loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 133 $ 92 $ 67____ ____ ________ ____ ____

Allowance for credit loss activity:2002 2001 2000_____ _____ _____

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . $ 177 $ 163 $ 134Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . 109 97 62Receivables written off. . . . . . . . . . . . . . . . . . . . . . . . . . (103) (82) (43)Recoveries on receivables previously written off. . 18 10 15Other — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (11) (5)_____ _____ _____Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 207 $ 177 $ 163_____ _____ __________ _____ _____

In estimating the allowance for credit losses, we review accountsthat are past due, non-performing or in bankruptcy.

Cat Financial’s net investment in financing leases:December 31,

2002 2001 2000_____ _____ _____Total minimum lease payments receivable . . . . . . . $3,794 $ 3,606 $3,477Estimated residual value of leased assets:

Guaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 272 283Unguaranteed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 604 682 713_____ _____ _____

4,704 4,560 4,473Less: Unearned income. . . . . . . . . . . . . . . . . . . . . . . . . 479 514 517_____ _____ _____Net investment in financing leases . . . . . . . . . . . . . . $4,225 $ 4,046 $ 3,956_____ _____ __________ _____ _____

TABLE I Continued — Finance Receivables Information_______________________________________________________________________________________________________________

NOTES continued


A-14

past due). Accrual is resumed, and previously suspended incomeis recognized, when the receivable becomes contractually currentand collection doubts are removed. Investment in loans/financeleases on non-accrual status were $370 and past due over 90 daysand still accruing were $72 as of December 31, 2002.

Cat Financial provides financing only when acceptable crite-ria are met. Credit decisions are based on, among other things,the customer’s credit history, financial strength and intended useof equipment. Cat Financial typically maintains a security inter-est in retail financed equipment and requires physical damageinsurance coverage on financed equipment.

Please refer to Table I on Pages A-13 and A-14 for additionalfinance receivables information and Note 17 and Table V onPages A-20 and A-21 for fair value information.

6. Inventories

December 31,2002 2001 2000______ _____ _____

Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 806 $ 846 $ 766Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316 239 256Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,454 1,658 1,485Supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 182 185______ _____ _____

$2,763 $ 2,925 $2,692______ _____ ___________ _____ _____

We had long-term material purchase obligations of approxi-mately $369 at December 31, 2002.

7. Property, plant and equipment

UsefulLives December 31,

(Years) 2002 2001 2000_____ _____ _____ _____Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — $ 149 $ 149 $ 143Buildings and land improvements. . . . . . . . 20-45 3,039 3,077 3,016Machinery, equipment and other. . . . . . . . . 3-10 7,015 6,658 6,674Equipment leased to others . . . . . . . . . . . . . . — 3,033 2,270 1,771Construction-in-process . . . . . . . . . . . . . . . . — 305 636 312_____ _____ _____Total property, plant and equipment,

at cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,541 12,790 11,916Less: Accumulated depreciation . . . . . . . . . 6,495 6,187 5,965_____ _____ _____Property, plant and equipment — net . . . . $7,046 $ 6,603 $5,951______ _____ ___________ _____ _____

We had commitments for the purchase or construction of cap-ital assets of approximately $202 at December 31, 2002.

Assets recorded under capital leases(1):December 31,

2002 2001 2000_____ _____ _____Gross capital leases(2). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 259 $ 444 $ 622Less: Accumulated depreciation. . . . . . . . . . . . . . . . . 170 318 483_____ _____ _____Net capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89 $ 126 $ 139_____ _____ __________ _____ _____(1) Included in Property, plant and equipment table above.(2) Consists primarily of machinery and equipment.

Equipment leased to others (primarily by Financial Products):December 31,

2002 2001 2000_____ _____ _____Equipment leased to others —

at original cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,033 $ 2,270 $ 1,771Less: Accumulated depreciation. . . . . . . . . . . . . . . . . 809 629 479_____ _____ _____Equipment leased to others — net . . . . . . . . . . . . . . $2,224 $ 1,641 $ 1,292_____ _____ __________ _____ _____

At December 31, 2002, scheduled minimum rental paymentsto be received for equipment leased to others were:

After2003 2004 2005 2006 2007 2007_____________________________________________________$482 $322 $190 $88 $33 $15

8. Investment in unconsolidated affiliated companies

The company’s investment in affiliated companies accountedfor by the equity method consists primarily of a 50% interest inShin Caterpillar Mitsubishi Ltd. (SCM) located in Japan. Combinedfinancial information of the unconsolidated affiliated companiesaccounted for by the equity method (generally on a three monthlag, e.g., SCM results reflect the periods ending September 30)was as follows:

Years ended December 31,

2002 2001 2000_____ _____ _____Results of Operations:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,734 $ 2,493 $ 2,773Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,168 1,971 2,220_____ _____ _____Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566 522 553Profit (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1) $ 9 $ (56)_____ _____ __________ _____ _____Caterpillar’s profit (loss) . . . . . . . . . . . . . . . . . . . . . . $ (4) $ 3 $ (28)_____ _____ __________ _____ _____

2002 2001 2000___________________ ___________________ ___________________Dealer Finance Dealer Finance Dealer Finance

Receivables Receivables Receivables Receivables Receivables Receivables_________ ________ _________ ________ _________ ________Cash flow from securitizations:Proceeds from initial sales of receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 614 $ — $ 600 $ 660 $ —Proceeds from subsequent sales of receivables into revolving facility . . . . . . 1,696 — 2,479 — 2,686 —Servicing fees received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7 5 6 4 8Other cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — 7

Characteristics of securitized receivables:At December 31:

Total securitized principal balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 240 $ 726 $ 500 $ 616 $ 710 $ 452Loans more than 30 days past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 32 — 31 — 22Weighted average maturity (in months) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 28 1 26 1 16

For the year ended December 31:Average securitized principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 619 504 836 537 631Net credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5 — 3 — 3

December 31,

2002 2001 2000_____ _____ _____Financial Position:

Assets:Current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,389 $ 1,451 $1,583Property, plant and equipment — net . . . . . . . . . 1,209 986 1,000Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493 290 352_____ _____ _____

3,091 2,727 2,935_____ _____ _____Liabilities:

Current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,117 $ 1,257 $1,284Long-term debt due after one year . . . . . . . . . . . . . 808 414 557Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 281 253_____ _____ _____

2,174 1,952 2,094_____ _____ _____Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 917 $ 775 $ 841_____ _____ __________ _____ _____

Caterpillar’s investment in unconsolidated affiliated companies:Investment in equity method companies . . . . . . . . . $ 437 $ 437 $ 429Plus: Investment in cost method companies . . . . . 310 350 122_____ _____ _____Investment in unconsolidated

affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . . $ 747 $ 787 $ 551_____ _____ __________ _____ _____

At December 31, 2002, consolidated “Profit employed in thebusiness” in Statement 2 included $73 representing undistributedprofit of the unconsolidated affiliated companies. In 2002, 2001and 2000, we received $4, $4 and $4, respectively, in dividendsfrom unconsolidated affiliated companies.

Certain investments in unconsolidated affiliated companiesare accounted for using the cost method. During first quarter 2001,Cat Financial invested for a limited partnership interest in a venturefinancing structure associated with Caterpillar’s rental strategyin the United Kingdom.

9. Intangible assets and goodwill

In July 2001, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 142 (SFAS 142),“Goodwill and Other Intangible Assets.” SFAS 142 addressesfinancial accounting and reporting for intangible assets and good-will. The Statement requires that goodwill and intangible assetshaving indefinite useful lives not be amortized, but rather be testedat least annually for impairment. Intangible assets that have finiteuseful lives will continue to be amortized over their useful lives.As required by SFAS 142, we adopted this new accounting stan-dard on January 1, 2002. Upon adoption, we performed the requiredtransitional impairment tests of goodwill and indefinite-livedintangible assets. Application of the transitional impairment pro-visions of SFAS 142 did not result in an impairment loss.

As of December 31, 2002, total intangible assets were $281.This included $191 of pension-related intangible assets. Theremaining $90 represents the net carrying value of intellectualproperty. The gross carrying amount of the intellectual propertywas $137 with accumulated amortization of $47. Amortizationexpense for the year was $13. Amortization expense related tointangible assets is expected to be:

2003 2004 2005 2006 2007 Thereafter_____________________________________________________$16 $14 $14 $12 $8 $26

During the year ended December 31, 2002, no goodwill wasacquired, impaired or disposed. Goodwill amortization expensewas $85 and $81 for 2001 and 2000, respectively. Excludinggoodwill amortization expense, profit for 2001 and 2000 was

$863 ($2.51 per share-basic, $2.49 per share-diluted) and $1,108($3.19 per share-basic, $3.18 per share-diluted), respectively.

10. Available-for-sale securities

Cat Insurance and Caterpillar Investment Management Ltd. hadinvestments in certain debt and equity securities at December 31,2002 and 2001, that have been classified as available-for-sale inaccordance with Statement of Financial Accounting StandardsNo. 115 (SFAS 115) and recorded at fair value based upon quotedmarket prices. These fair values are included in “Other assets”in Statement 3. Gains and losses arising from the revaluation ofavailable-for-sale securities are included, net of applicable deferredincome taxes, in equity (“Accumulated other comprehensiveincome” in Statement 3). Realized gains and losses on sales ofinvestments are determined using the average cost method fordebt instruments and the FIFO method for equity securities.

December 31, 2002Cost Pre-Tax Net FairBasis Gains (Losses) Value____ __________ ____

Government debt . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89 $ — $ 89Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 1 209Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 (51) 169____ ____ ____

$517 $ (50) $467____ ____ ________ ____ ____December 31, 2001

Cost Pre-Tax Net FairBasis Gains (Losses) Value____ __________ ____

Government debt . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80 $ — $ 80Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 1 158Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 (40) 160____ ____ ____

$437 $ (39) $398____ ____ ________ ____ ____The fair value of the available-for-sale debt securities at

December 31, 2002, by contractual maturity, is shown below.Expected maturities will differ from contractual maturities becauseborrowers may have the right to call or prepay obligations.

FairValue____

Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14Due after one year through five years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $128Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $128

Proceeds from sales of investments in debt and equity secu-rities during 2002 and 2001 were $288 and $246, respectively.Gross gains of $9 and $2 and gross losses of $2 and $5 have beenincluded in current earnings as a result of these sales for 2002 and2001, respectively.

During 2002, we recognized a $41 pretax charge in accordancewith the application of SFAS 115 for “other than temporary”declines in the market value of securities in the Cat Insuranceinvestment portfolio.

11. Postemployment benefit plans

A. Pension plansWe have both U.S. and non-U.S. pension plans covering sub-stantially all of our employees. The defined benefit plans providea benefit based on years of service and/or the employee’s averageearnings near retirement.

Please refer to Table II on Page A-16 for additional financialinformation.

Caterpillar Inc.

A-15

NOTES continued


A-16

TABLE II — Financial Information Related to Pension Plans_______________________________________________________________________________________________________________U.S. Pension Benefits Non-U.S. Pension Benefits___________________________ ___________________________

2002 2001 2000 2002 2001 2000_______ _______ _______ _______ _______ _______Change in benefit obligation:

Benefit obligation, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,382 $ 6,921 $ 6,536 $ 1,229 $ 1,168 $ 1,200Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 99 98 38 35 33Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529 516 486 70 65 66Business combinations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 2 —Plan amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2 1 — 2 1Actuarial losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 389 329 135 (17) 58Foreign currency exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 100 21 (145)Participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 10 9 11Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (611) (545) (529) (65) (56) (56)Special termination benefits(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 — — — — —_______ _______ _______ _______ _______ _______Benefit obligation, December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,844 $ 7,382 $ 6,921 $ 1,517 $ 1,229 $ 1,168_______ _______ _______ _______ _______ _______

Change in plan assets:Fair value of plan assets, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,431 $ 8,203 $ 8,411 $ 1,050 $ 1,287 $ 1,289Actual return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (512) (230) 316 (87) (217) 161Business combinations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 2 —Foreign currency exchange rate changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 72 12 (160)Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 3 5 44 13 42Participant contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 10 9 11Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (611) (545) (529) (65) (56) (56)_______ _______ _______ _______ _______ _______Fair value of plan assets, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,443 $ 7,431 $ 8,203 $ 1,024 $ 1,050 $ 1,287_______ _______ _______ _______ _______ _______

Over (under) funded, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,401) $ 49 $ 1,282 $ (493) $ (179) $ 119Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 327 375 33 36 37Unrecognized net actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,009 318 (1,142) 547 198 (99)Unrecognized net obligation existing at adoption of SFAS 87 . . . . . . . . . . . — — 1 9 7 4Contributions made after measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 22 4 —_______ _______ _______ _______ _______ _______Net amount recognized in financial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 886 $ 694 $ 516 $ 118 $ 66 $ 61_______ _______ _______ _______ _______ _______

Components of net amount recognized in financial position:Prepaid benefit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,071 $ 953 $ 795 $ 154 $ 99 $ 106Accrued benefit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (185) (259) (279) (36) (33) (45)Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 185 — 35 25 1Adjustment for minimum pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (911) (323) — (434) (130) (3)Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 755 138 — 399 105 2_______ _______ _______ _______ _______ _______Net asset (liability) recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 886 $ 694 $ 516 $ 118 $ 66 $ 61_______ _______ _______ _______ _______ _______

Components of net periodic benefit cost:Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 115 $ 99 $ 98 $ 38 $ 35 $ 33Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529 516 486 70 65 66Expected return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (783) (806) (768) (94) (90) (86)Amortization of:

Net asset existing at adoption of SFAS 87 . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (19) (2) (1) (4)Prior service cost(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 49 71 5 5 5Net actuarial (gain) loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (34) (59) — (1) (3)_______ _______ _______ _______ _______ _______

Total (benefit) cost included in results of operations . . . . . . . . . . . . . . . . . . . . . $ (90) $ (176) $ (191) $ 17 $ 13 $ 11_______ _______ _______ _______ _______ ______________ _______ _______ _______ _______ _______Rate assumptions:

Assumed discount rate(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0% 7.3% 7.8% 5.4% 5.8% 6.0%Expected rate of compensation increase(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0% 4.0% 4.0% 3.2% 3.5% 4.0%Expected long-term rate of return on plan assets(4) . . . . . . . . . . . . . . . . . . . . . . . 9.8% 10.0% 10.0% 7.6% 7.8% 7.8%

(1) Amount recognized as expense in 2001 in conjunction with the U.S. salaried and management employee reduction. Please refer to Note 24 on Page A-27 for additional information.(2) Prior service costs are amortized using the straight-line method over the average remaining service period of employees expected to receive benefits from the plan amendment.(3) Weighted-average rates as of December 31.(4) Weighted-average rates used in determining consolidated expense. The weighted-average rates for 2003 are 9.0% and 7.1% for U.S. and non-U.S. plans, respectively.

The following amounts relate to our pension plans with accumulated benefit obligations in excess of plan assets:U.S. Pension Benefits Non-U.S. Pension Benefits___________________________ ___________________________

At December 31, At December 31,2002 2001 2000 2002 2001 2000_______ _______ _______ _______ _______ _______

Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,416) $ (3,010) $ (2,901) $ (1,334) $ (1,088) $ (36)Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,439) $ (3,011) $ (2,902) $ (1,490) $ (1,203) $ (41)Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,345 $ 2,462 $ 2,813 $ 990 $ 1,015 $ 20

B. Other postretirement benefit plansWe have defined-benefit retirement health care and life insuranceplans for substantially all of our U.S. employees. Plan amend-ments made in 2002 included an increase in retiree cost sharingof health care benefits, elimination of company payments for

Medicare part B premiums and significant reductions in retireelife insurance.

Please refer to Table III below for additional financialinformation.

Caterpillar Inc.

A-17

TABLE III — Financial Information Related to Other Postretirement Benefit Plans_______________________________________________________________________________________________________________Other Postretirement Benefits___________________________

2002 2001 2000_______ _______ _______Change in benefit obligation:

Benefit obligation, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,514 $ 3,869 $ 3,821Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 72 71Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292 289 292Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (474) 16 —Actuarial losses (gains). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340 528 (65)Foreign currency exchange rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 —Participant contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4 3Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (294) (266) (253)_______ _______ _______Benefit obligation, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,465 $ 4,514 $ 3,869_______ _______ _______

Change in plan assets:Fair value of plan assets, January 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,109 $ 1,324 $ 1,291Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (113) (71) 22Participant contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4 3Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (294) (266) (247)Employer funding of benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 118 255_______ _______ _______Fair value of plan assets, December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 849 $ 1,109 $ 1,324_______ _______ _______

Over (under) funded, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,616) $ (3,405) $ (2,545)Unrecognized prior service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (283) 167 171Unrecognized net actuarial (gain) loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 976 413 (317)Contributions made after measurement date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 17 —_______ _______ _______Net amount recognized in financial position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,903) $ (2,808) $ (2,691)_______ _______ _______

Components of net amount recognized in financial position:Accrued benefit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,903) $ (2,808) $ (2,691)_______ _______ _______Net asset (liability) recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,903) $ (2,808) $ (2,691)_______ _______ _______

Components of net periodic benefit cost:Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80 $ 72 $ 71Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292 289 292Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (115) (136) (123)Amortization of:

Prior service cost(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) 21 19Net actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 (9) —_______ _______ _______

Total (benefit) cost included in results of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 240 $ 237 $ 259_______ _______ ______________ _______ _______

Rate assumptions:Assumed discount rate(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0% 7.3% 7.8%Expected rate of compensation increase(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0% 4.0% 4.0%Expected long-term rate of return on plan assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.8% 10.0% 10.0%

For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. This rate was assumed to decrease gradually to 4.5% for 2009.(1) Prior service costs are amortized using the straight-line method over the average remaining service period of employees affected by the plan amendment.(2) Weighted-average rates as of December 31.(3) Weighted-average rates used in determining consolidated expense. The weighted-average rate for 2003 is 9.0%.

Effects of a one-percentage-point change in the assumed health care cost trend rates for 2002:One-percentage- One-percentage-

point increase point decrease___________ ___________Approximate effect on the total of service and interest cost components of other postretirement benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . $ 31 $ (26)Approximate effect on accumulated postretirement benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $272 $(230)

C. Other postemployment benefit plansWe offer long-term disability benefits, continued health care fordisabled employees, survivor income benefits insurance and sup-plemental unemployment benefits to substantially all eligibleU.S. employees.

D. Summary of long-term liability:December 31,

2002 2001 2000______ _____ _____Pensions:

U.S. pensions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 911 $ 323 $ —Non-U.S. pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . 434 130 3______ _____ _____

Total pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,345 453 3Postretirement benefits other than pensions. . . . . . 2,614 2,578 2,441Other postemployment benefits . . . . . . . . . . . . . . . . . 79 72 70______ _____ _____

$4,038 $ 3,103 $2,514______ _____ ___________ _____ _____12. Short-term borrowings

December 31,2002 2001 2000_____ _____ _____

Machinery and Engines:Notes payable to banks . . . . . . . . . . . . . . . . . . . . . . . $ 64 $ 219 $ 104Commercial paper. . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 237Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 28_____ _____ _____

64 219 369Financial Products:

Notes payable to banks . . . . . . . . . . . . . . . . . . . . . . . 174 126 92Commercial paper. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,682 1,715 400Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 120 110_____ _____ _____

2,111 1,961 602_____ _____ _____Total short-term borrowings . . . . . . . . . . . . . . . . . . . . $2,175 $ 2,180 $ 971_____ _____ __________ _____ _____

The weighted average interest rates on external short-termborrowings outstanding were:

December 31,2002 2001 2000_____ _____ _____

Notes payable to banks . . . . . . . . . . . . . . . . . . . . . . . . . 5.7% 5.6% 6.9%Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5% 2.5% 5.9%Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8% 3.4% 6.8%

Please refer to Note 17 on Page A-20 and Table V on Page A-21for fair value information on short-term borrowings.

13. Long-term debtDecember 31,

2002 2001 2000_____ _____ _____Machinery and Engines:

Notes — 6.000% due 2003 . . . . . . . . . . . . . . . . $ — $ 253 $ 252Notes — 6.550% due 2011 . . . . . . . . . . . . . . . . 249 249 —Debentures — 9.000% due 2006. . . . . . . . . . . 209 211 203Debentures — 6.000% due 2007. . . . . . . . . . . 189 180 162Debentures — 7.250% due 2009. . . . . . . . . . . 318 321 300Debentures — 9.375% due 2011. . . . . . . . . . . 123 123 123Debentures — 9.750% due 2000-2019 . . . . . — — 139Debentures — 9.375% due 2021. . . . . . . . . . . 236 236 236Debentures — 8.000% due 2023. . . . . . . . . . . 199 199 199Debentures — 6.625% due 2028. . . . . . . . . . . 299 299 299Debentures — 7.300% due 2031. . . . . . . . . . . 348 348 —Debentures — 6.950% due 2042. . . . . . . . . . . 249 — —Debentures — 7.375% due 2097. . . . . . . . . . . 297 297 297Medium-term notes . . . . . . . . . . . . . . . . . . . . . . . . 25 26 96Capital lease obligations . . . . . . . . . . . . . . . . . . . 538 467 474Commercial paper supported by revolving

credit agreements (Note 14) . . . . . . . . . . . . . . — 130 —Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 153 74______ ______ ______

Total Machinery and Engines . . . . . . . . . . . . . . . . . 3,403 3,492 2,854

December 31,

2002 2001 2000_____ _____ _____Financial Products:

Commercial paper supported by revolvingcredit agreements (Note 14) . . . . . . . . . . . . . . $ 1,825 $ 1,755 $ 2,732

Medium-term notes . . . . . . . . . . . . . . . . . . . . . . . . 6,298 5,972 5,687Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 72 61______ ______ ______

Total Financial Products . . . . . . . . . . . . . . . . . . . . . 8,193 7,799 8,480______ ______ ______Total long-term debt due after one year . . . . . . . $11,596 $ 11,291 $11,334______ ______ ____________ ______ ______

All outstanding notes and debentures are unsecured. The cap-ital lease obligations are collateralized by leased manufacturingequipment and/or security deposits.

The 6% notes due in 2003, classified as debt due within oneyear, may be redeemed in whole at their principal amount if weare required to pay additional taxes or duties as a result of achange in tax law and that obligation cannot be reasonablyavoided. In addition, if the identity of beneficial owners of thenotes must be disclosed in certain circumstances, we would berequired either to redeem the notes or satisfy the information dis-closure requirement through the payment of certain taxes orcharges. We also may purchase the 6% notes at any time in theopen market.

The 6% debentures due in 2007, were sold at significant orig-inal issue discounts ($144). This issue is carried net of the unamor-tized portion of its discount, which is amortized as interestexpense over the life of the issue. These debentures have a prin-cipal at maturity of $250 and an effective annual cost of 13.3%.We may redeem them, at our option, at an amount equal to therespective principal at maturity.

We may redeem the 6.55% notes and the 7.25%, 6.625%, 7.3%,6.95% and 7.375% debentures in whole or in part at our optionat any time at a redemption price equal to the greater of 100%of the principal amount of the debentures to be redeemed or thesum of the present value of the remaining scheduled payments.

The terms of other notes and debentures do not specify aredemption option prior to maturity.

The medium-term notes are offered on a continuous basisthrough agents and are primarily at fixed rates. At December 31,2002, Machinery and Engines medium-term notes had a weightedaverage interest rate of 8.1% with one to two years remaining tomaturity. Financial Products medium-term notes have a weightedaverage interest rate of 3.7% with remaining maturities up to13 years at December 31, 2002.

The aggregate amounts of maturities of long-term debt duringeach of the years 2003 through 2007, including amounts duewithin one year and classified as current, are:

December 31,

2003 2004 2005 2006 2007_____ _____ _____ _____ _____Machinery and Engines . . . . . . . . $ 258 $ 67 $ 18 $ 231 $ 204Financial Products. . . . . . . . . . . . . 3,654 2,714 1,474 981 818_____ _____ _____ _____ _____

$ 3,912 $ 2,781 $ 1,492 $ 1,212 $ 1,022_____ _____ _____ _____ __________ _____ _____ _____ _____

Interest paid on short-term and long-term borrowings for 2002,2001 and 2000 was $815, $1,009 and $930, respectively.

Please refer to Note 17 on Page A-20 and Table V on Page A-21for fair value information on long-term debt.

NOTES continued


A-18

14. Credit commitmentsDecember 31, 2002

Machinery FinancialConsolidated and Engines Products_________ _________ _______

Credit lines available:Global credit facility. . . . . . . . . . . . . . $4,550 (1) $4,550 (1) $3,950 (1)

Other external . . . . . . . . . . . . . . . . . . . . 1,353 542 811Intercompany. . . . . . . . . . . . . . . . . . . . . — 500 (2) 826 (2)_____ _____ _____

Total credit lines available . . . . . . . . . 5,903 5,592 5,587Utilized credit. . . . . . . . . . . . . . . . . . . . . . . 238 64 174_____ _____ _____Unused credit . . . . . . . . . . . . . . . . . . . . . . $5,665 $5,528 $5,413_____ _____ __________ _____ _____(1) A global credit facility of $4,550 is available to both Machinery and Engines and Financial

Products (Cat Financial) to support commercial paper programs. Cat Financial may use up to90% of the available facility subject to a maximum debt to equity and a minimum interest cov-erage ratio. Machinery and Engines may use up to 100% of the available facility subject to aminimum level of net worth. Based on these restrictions, and the allocation decisions of availablecredit made by management, the portion of the facility available to Cat Financial at December 31,2002, was $3,950. The facility is comprised of two components; $2,425 expiring in September 2003and $2,125 expiring in September 2006. The facility expiring in September 2003 has a provi-sion which allows Caterpillar to obtain a one-year term loan in September 2003 that maturesin September 2004.

(2) Represents variable lending agreements between Caterpillar Inc. and Cat Financial.

Based on long-term credit agreements, $1,825, $1,885 and$2,732 of commercial paper outstanding at December 31, 2002,2001 and 2000, respectively, was classified as long-term debtdue after one year.

15. Capital stock

A. Stock options

In 1996, stockholders approved the Stock Option and Long-TermIncentive Plan (the Plan) providing for the granting of options topurchase common stock to officers and other key employees, aswell as non-employee directors. The Plan reserves 47 million sharesof common stock for issuance (39 million under the Plan and 8 mil-lion under prior stock option plans). Options vest at the rate ofone-third per year over the three year period following the dateof grant, and have a maximum term of 10 years. Common sharesissued under stock options, including treasury shares reissued,totaled 882,580, 693,444 and 346,333, in 2002, 2001 and 2000,respectively.

The Plan grants options which have exercise prices equal to theaverage market price on the date of grant. As required by SFAS 148,a summary of the pro forma net income and profit per shareamounts is shown in Note 1K on Page A-9. The fair value of eachoption grant is estimated at the date of grant using the Black-Scholesoption-pricing model.

Please refer to Table IV below and on Page A-20 for addi-tional financial information on our stock options.

Caterpillar Inc.

A-19

TABLE IV — Financial Information Related to Capital Stock_______________________________________________________________________________________________________________

Changes in the status of common shares subject to issuance under options:2002 2001 2000___________________ ___________________ ___________________

Weighted- Weighted- Weighted-Average Average AverageExercise Exercise Exercise

Shares Price Shares Price Shares Price_________ _______ _________ _______ _________ _______Fixed Options:

Outstanding at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,295,230 $ 47.34 26,336,074 $ 44.49 20,404,176 $ 45.90Granted to officers and key employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,050,864 $ 50.72 7,512,206 $ 53.53 6,621,858 $ 38.41Granted to outside directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000 $ 58.87 52,000 $ 45.51 44,000 $ 43.75Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,580,754) $ 26.41 (1,273,361) $ 23.64 (543,090) $ 19.49Lapsed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (95,976) $ 50.28 (331,689) $ 47.13 (190,870) $ 55.17_________ ________ ________Outstanding at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,721,364 $ 48.91 32,295,230 $ 47.34 26,336,074 $ 44.49_________ ________ _________________ ________ ________Options exercisable at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,909,130 $ 48.23 19,062,802 $ 45.74 15,214,347 $ 42.47Weighted-average fair value of options granted during the year . . . . . . . . . $ 14.85 $ 14.56 $ 10.92

Stock options outstanding and exercisable:Options Outstanding Options Exercisable__________________________________________________ ________________________________Weighted-Average

Remaining# Outstanding Contractual Life Weighted-Average # Outstanding Weighted-Average

Exercise Prices at 12/31/02 (Years) Exercise Price at 12/31/02 Exercise Price_____________ _____________ _____________ _____________ _____________ _____________$15.19-$18.77 264,617 0.4 $18.66 264,617 $18.66$26.77-$39.19 10,479,468 5.5 $35.26 8,535,350 $34.55$43.75-$62.34 27,977,279 7.5 $54.30 15,109,163 $56.47_____________ _____________

38,721,364 6.9 $48.91 23,909,130 $48.23_____________ __________________________ _____________


B. Restricted stock

The Plan permits the award of restricted stock to officers andother key employees, as well as non-employee directors. During2002, 2001 and 2000, officers and other key employees wereawarded 52,475 shares, 143,686 shares and 52,032 shares, respec-tively, of restricted stock. During 2002, 8,450 restricted shares(in phantom form) were awarded to officers and other key employ-ees. During 2001 and 2000, non-employee directors were granted9,750 shares and 9,050 shares, respectively, of restricted stock.

C. Stockholders’ rights plan

We are authorized to issue 5,000,000 shares of preferred stock,of which 2,000,000 shares have been designated as Series AJunior Participating Preferred Stock of $1 par value. None of thepreferred shares have been issued.

Stockholders would receive certain preferred stock purchaserights if someone acquired or announced a tender offer to acquire15% or more of outstanding Caterpillar stock. In essence, thoserights would permit each holder (other than the acquiring per-son) to purchase one share of Caterpillar stock at a 50% discountfor every share owned. The rights, designed to protect the inter-ests of Caterpillar stockholders during a takeover attempt, expireDecember 11, 2006.

16. Profit per share

Stock options to purchase 27,881,279, 19,886,054 and 12,636,262shares of common stock at a weighted-average price of $54.34,$55.79 and $57.14 were outstanding during 2002, 2001 and2000, respectively, but were not included in the computation ofdiluted profit per share because the options’ exercise price wasgreater than the average market price of the common shares.

17. Fair values of financial instruments

We used the following methods and assumptions to estimate thefair value of our financial instruments:

Cash and short-term investments — carrying amount approxi-mated fair value.

Long-term investments (other than investments in uncon-solidated affiliated companies) — fair value was estimatedbased on quoted market prices.

Foreign currency forward and option contracts — fair valueof forward contracts was determined by discounting the futurecash flow resulting from the differential between the contract

price and the forward rate. Fair value of option contracts was deter-mined by using the Black-Scholes model.

Finance receivables — fair value was estimated by discount-ing the future cash flow using current rates, representative ofreceivables with similar remaining maturities. Historical bad-debt experience also was considered.

Short-term borrowings — carrying amount approximatedfair value.

Long-term debt — for Machinery and Engines notes anddebentures, fair value was estimated based on quoted marketprices. For Financial Products, fair value was estimated by dis-counting the future cash flow using our current borrowing ratesfor similar types and maturities of debt, except for floating ratenotes and commercial paper supported by revolving credit agree-ments for which the carrying amounts were considered a reason-able estimate of fair value.

Interest rate swaps — fair value was estimated based on theamount that we would receive or pay to terminate our agree-ments as of year end.

Please refer to Table V on Page A-21 for the fair values of ourfinancial instruments.

18. Concentration of credit risk

Financial instruments with potential credit risk consist primar-ily of trade and finance receivables and short-term and long-terminvestments. Additionally, to a lesser extent, we have a potentialcredit risk associated with counterparties to derivative contracts.

Trade receivables are primarily short-term receivables fromindependently owned and operated dealers which arise in the nor-mal course of business. We perform regular credit evaluations ofour dealers. Collateral generally is not required, and the majorityof our trade receivables are unsecured. We do, however, whendeemed necessary, make use of various devices such as securityagreements and letters of credit to protect our interests. No singledealer represents a significant concentration of credit risk.

Finance receivables primarily represent receivables under install-ment sales contracts, receivables arising from leasing transactionsand notes receivable. Receivables from customers in construction-related industries made up approximately one-third of total financereceivables at December 31, 2002, 2001 and 2000. We generallymaintain a secured interest in the equipment financed. No singlecustomer or region represents a significant concentration of creditrisk.

NOTES continued


A-20

Weighted-average assumptions used indetermining fair value of option grants:

Grant Year

2002 2001 2000_____ _____ _____Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.55% 2.49% 2.11%Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35.0% 30.1% 26.4%Risk-free interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.13% 4.88% 6.20%Expected lives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 5 years 5 years

TABLE IV Continued — Financial Information Related to Capital Stock_______________________________________________________________________________________________________________

Caterpillar Inc.

A-21

Short-term and long-term investments are held with high qualityinstitutions and, by policy, the amount of credit exposure to anyone institution is limited. Long-term investments are comprisedof investments which collateralize capital lease obligations (seeNote 13 on Page A-18) and investments of Cat Insurance sup-porting insurance reserve requirements.

Outstanding derivative instruments, with notional amountstotaling $6,983, $5,872 and $6,794, and terms generally rang-ing up to five years, were held at December 31, 2002, 2001 and2000, respectively. Collateral is not required of the counterpar-ties or of our company. We do not anticipate nonperformanceby any of the counterparties. Our exposure to credit loss in theevent of nonperformance by the counterparties is limited to onlythose gains that we have recorded, but have not yet received,cash payment. At December 31, 2002, 2001 and 2000, the exposureto credit loss was $176, $80 and $30, respectively.

Please refer to Note 17 on Page A-20 and Table V above forfair value information.

19. Operating leases

We lease certain computer and communications equipment,transportation equipment and other property through operatingleases. Total rental expense for operating leases was $240, $256and $267 for 2002, 2001 and 2000, respectively.

Minimum payments for operating leases having initial orremaining non-cancelable terms in excess of one year are:

Years ended December 31,After

2003 2004 2005 2006 2007 2007 Total_____________________________________________________$185 $154 $102 $72 $53 $300 $866

20. Guarantees and product warranty

We have guaranteed to repurchase loans of certain Caterpillardealers from the Dealer Capital Asset Trust (DCAT) in the event ofdefault. These guarantees arose in conjunction with Cat Financial’srelationship with third party dealers who sell Caterpillar equip-ment. These guarantees have terms ranging from one to four yearsand are secured primarily by dealer assets. At December 31, 2002,the total amount outstanding under these guarantees was $290and the related book value was zero. For guarantees entered intoafter December 31, 2002, we will record a liability in accordancewith FIN 45.

Our product warranty liability is determined by applying his-torical claim rate experience to the current field population anddealer inventory. Generally, historical claim rates are developedusing a 12-month rolling average of actual warranty payments.These rates are applied to the field population and dealer inven-tory to determine the liability.

2002 2001 2000______ _____ _____Warranty liability, January 1 . . . . . . . . . . . . . . . . . . . . $ 652 $ 615 $ 578Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (494) (478) (471)Provision for warranty . . . . . . . . . . . . . . . . . . . . . . . . . . 535 515 508______ _____ _____Warranty liability, December 31 . . . . . . . . . . . . . . . . . $ 693 $ 652 $ 615______ _____ ___________ _____ _____

21. Environmental and legal matters

The company is regulated by federal, state and international envi-ronmental laws governing our use of substances and control ofemissions in all our operations. Compliance with these existinglaws has not had a material impact on our capital expenditures,earnings or competitive position.

TABLE V — Fair Values of Financial Instruments_______________________________________________________________________________________________________________

Asset (Liability) 2002 2001 2000_________________ _________________ _________________At December 31 Carrying Fair Carrying Fair Carrying Fair

Amount Value Amount Value Amount Value Reference #________ ________ ________ ________ ________ ________ ________Cash and short-term investments . . . . . . . . . . . . . . . . . . ) $ 309) $ 309) $ 400) $ 400) $ 334) $ 334) Statement 3, Note 18

Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 874) 874) 791) 791) 741) 741) Note 18

Foreign currency contracts . . . . . . . . . . . . . . . . . . . . . . . . . . 47) 47) 2) 2) (30) (34) Note 2

Finance receivables — net(excluding finance type leases(1)) . . . . . . . . . . . . . . . . . . 12,093) 12,177) 10,931) 10,957) 10,479) 10,582) Note 5

Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,175) 2,175) (2,180) (2,180) (971) (971) Note 12

Long-term debt(including amounts due within one year)

Machinery and Engines. . . . . . . . . . . . . . . . . . . . . . . . . . 3,661) 4,185) (3,565) (3,749) (3,058) (3,198) Note 13Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,847) 12,118) (10,857) (11,048) (11,038) (11,154) Note 13

Interest rate swapsMachinery and Engines —

in a net receivable position . . . . . . . . . . . . . . . . . . . . . . —) —) —) —) —) 25) Note 2in a net payable position. . . . . . . . . . . . . . . . . . . . . . . . . —) —) —) —) (1) —) Note 2

Financial Products —in a net receivable position . . . . . . . . . . . . . . . . . . . . . . 84) 84) 58) 58) 8) 27) Note 2in a net payable position. . . . . . . . . . . . . . . . . . . . . . . . . (85) (85) (71) (71) —) (25) Note 2

(1) Excluded items have a net carrying value at December 31, 2002, 2001 and 2000 of $1,369, $1,185 and $1,087, respectively.

We are cleaning up hazardous waste at a number of locations,often with other companies, pursuant to federal and state laws.When it is likely we will pay cleanup costs at a site and thosecosts can be estimated, the costs are charged against our earnings.In making that estimate, we do not consider amounts expectedto be recovered from insurance companies and others.

The amount set aside for environmental cleanup is not mate-rial and is included in “Accrued expenses” in Statement 3. If arange of liability estimates is available on a particular site, weaccrue the lower end of that range.

We cannot estimate costs on sites in the very early stages ofcleanup. Currently, we have five sites in the very early stages ofcleanup, and there is no more than a remote chance that a mate-rial amount for cleanup will be required.

Pursuant to a consent decree Caterpillar entered with theUnited States Environmental Protection Agency (EPA), the com-pany was required to meet certain emission standards by October2002. The decree provides that if the manufacturers were unableto meet the standards at that time they would be required to paya non-conformance penalty (NCP) on each engine sold that didnot meet the standard. The amount of the NCP would be basedon how close to meeting the standard the engine came — the moreout of compliance the higher the penalty. The company beganshipping lower emission engines in October 2002 as a bridgeuntil fully compliant Advanced Combustion Emission ReductionTechnology (ACERT™) engines are introduced in 2003.

Our expense for NCPs was $40 in 2002. This amount was basedon levels we believe the engines will perform when tested. Theactual NCP amount will not be known until final testing with theEPA is completed with all models during 2003. Aside from cus-tomary research and development expenses, the net impact ofproducing and selling bridge engines negatively impacted 2002financial results by $24 ($17 after tax or about 5 cents per share)as NCPs, product cost increases and ramp-up production costswere partially offset by price increases for these engines. Becauseof increased volumes in 2003, NCP expense will be significantlyhigher than in 2002, however, we expect the net unfavorableimpact of producing and selling bridge engines to be no morethan 2002. We do not anticipate paying NCPs beyond 2003.

The consent decree also provided the ability to “bank” creditsprior to October 2002 that could be used to offset non-conformingengines produced after January 1, 2003. That is, if a company wasable to produce and sell engines that were below the applicablestandard prior to October 2002, then the company could applythe emission credits created by those engines to engines pro-duced after January 1, 2003 that do not meet the consent decreestandard. For example, an engine produced and sold prior toOctober 2002 that produced 3.5 grams of NOx as compared to4.0 gram standard would create a 0.5 gram credit. This creditwould be “banked” to be used to offset the NOx deficiency ofan engine produced after January 1, 2003 that did not meet theconsent decree standard. Given this scenario, a company couldproduce and sell a 3.0 gram engine in 2003 without paying anNCP even though the engine exceeds the 2.5 gram standard.

We produced and sold 70,399 mid-range engines and 958 heavy-duty engines prior to October 2002 which yielded emissions belowthe applicable standard for that period, resulting in 20,987.8 Mgof mid-range banked credits and 1,230.2 Mg of heavy-duty banked

credits. We do not expect to pay any NCPs on our medium-dutyengines in 2003 due to these banked credits. Of the approximately25,800 non-conforming heavy-duty engines we anticipate build-ing after January 1, 2003, credits are expected to offset the NCPson approximately 3,000 of these units.

In addition to the above, the consent decree required Caterpillarto pay a fine of $25, which was expensed in 1998, and to makeinvestments totaling $35 in environmental-related projects byJuly 2007. Qualifying investments totaling approximately $10were made in 2002. Total qualifying investments to date for theseprojects is approximately $21.

On January 16, 2002, Caterpillar commenced an action againstNavistar International Transportation Corporation and InternationalTruck & Engine Corporation (Navistar). Caterpillar seeks a declar-atory judgment upholding a long-term purchase contract plusdamages arising from Navistar’s alleged breach of contract. OnJanuary 22, 2003, Caterpillar filed its First Amended Complaintto add four additional defendants and to add claims alleging thattwo of the new defendants colluded with Navistar to utilize tech-nology misappropriated from Caterpillar. At December 31, 2002,the past due receivable from Navistar related to this case was $104.On January 17, 2002, Navistar commenced an action againstCaterpillar that alleges we breached various aspects of the long-term purchase contract. On April 2, 2002, the Court grantedCaterpillar’s Motion for Involuntary Dismissal of this action;Navistar subsequently asserted its claims as counterclaims in theaction Caterpillar filed in Peoria. We believe Navistar’s claimsare without merit, and resolution of these matters will not havea material impact on our financial statements.

On May 7, 2002, International Truck and Engine Corporationcommenced an action against Caterpillar in the Circuit Court ofDuPage County, Illinois that alleges Caterpillar breached variousaspects of a long-term agreement term sheet. In its third amendedcomplaint, International seeks a declaration from the court thatthe term sheet constitutes a legally binding contract for the saleof heavy-duty engines at specified prices through the end of 2006,alleges that Caterpillar breached the term sheet by raising certainprices effective October 1, 2002, and also alleges that Caterpillarbreached an obligation to negotiate a comprehensive long-termagreement referenced in the term sheet. International furtherclaims that Caterpillar improperly restricted the supply of heavy-duty engines to International from June through September 2002.International seeks damages and injunctive relief. Caterpillarfiled an answer denying International’s claims and has filed acounterclaim seeking a declaration that the term sheet has effec-tively been terminated. Caterpillar denies International’s claimsand will vigorously contest them. The company further believesthat final resolution of this matter will not have a material impacton our financial statements. This matter is not related to the breachof contract action brought by Caterpillar against Internationalcurrently pending in the Circuit Court of Peoria County, Illinois.

22. Segment information

A. Basis for segment information

The company is organized based on a decentralized structure thathas established accountabilities to continually improve businessfocus and increase our ability to react quickly to changes in boththe global business cycle and competitors’ actions. Our current

NOTES continued


A-22

Caterpillar Inc.

A-23

structure uses a product, geographic matrix organization com-prised of multiple profit and service center divisions.

Caterpillar is a highly integrated company. The majority of ourprofit centers are product focused. They are primarily responsiblefor the design, manufacture and ongoing support of their products.However, some of these product-focused profit centers also havemarketing responsibilities. We also have geographically-basedprofit centers that are focused primarily on marketing. However,most of these profit centers also have some manufacturing respon-sibilities. One of our profit centers provides various financialservices to our customers and dealers. The service center divisionsperform corporate functions and provide centralized services.

We have developed an internal measurement system to eval-uate performance and to drive continuous improvement. Thismeasurement system, which is not based on generally acceptedaccounting principles (GAAP), is intended to motivate desiredbehavior of employees and drive performance. It is not intendedto measure a division’s contribution to enterprise results. Thesales and cost information used for internal purposes varies signif-icantly from our consolidated, externally reported informationresulting in substantial reconciling items. Each division has specificperformance targets and is evaluated and compensated based onachieving those targets. Performance targets differ from division todivision; therefore, meaningful comparisons cannot be made amongthe profit or service center divisions. It is the comparison of actualresults to budgeted results that makes our internal reporting valu-able to management. Consequently, we feel that the financialinformation required by Statement of Financial AccountingStandards No. 131 (SFAS 131) “Disclosures about Segments ofan Enterprise and Related Information” has limited value for ourexternal readers.

Due to Caterpillar’s high level of integration and our concernthat segment disclosures based on SFAS 131 requirements havelimited value to external readers, we are continuing to disclosefinancial results for our three lines of business (Machinery,Engines and Financial Products) in our Management’s Discussionand Analysis beginning on Page A-32.

B. Description of segments

The profit center divisions meet the SFAS 131 definition of“operating segments;” however, the service center divisions donot. Several of the profit centers have similar characteristics andhave been aggregated. The following is a brief description of ourseven reportable segments and the business activities included inthe “All other” category.

Primarily responsible for market-ing products through dealers in Australia, Asia (excluding Japan)and the Pacific Rim. Also includes the regional manufacturingof some products which also are produced by Construction &Mining Products.

Primarily responsible forthe design, manufacture and ongoing support of small, mediumand large machinery used in a variety of construction and min-ing applications. Also includes the design, manufacture, procure-ment and marketing of components and control systems that areconsumed primarily in the manufacturing of our machinery.

Primarily responsible for marketing prod-ucts through dealers in Europe, Africa, the Middle East and the

Commonwealth of Independent States. Also includes the regionalmanufacturing of some products which are also produced byConstruction & Mining Products and Power Products.

Provides financing to cus-tomers and dealers for the purchase and lease of Caterpillar andother equipment, as well as some financing for Caterpillar salesto dealers. Financing plans include operating and finance leases,installment sale contracts, working capital loans and wholesalefinancing plans.The division also provides various forms ofinsurance to customers and dealers to help support the purchaseand lease of our equipment.

Primarily responsible for mar-keting products through dealers in Latin America. Also includesthe regional manufacturing of some products that also are pro-duced by Construction & Mining Products and Power Products.

Primarily responsible for the design, man-ufacture, marketing and ongoing support of reciprocating andturbine engines along with related systems. These engines andrelated systems are used in products manufactured in other seg-ments, on-highway trucks and locomotives; and in a variety ofconstruction, electric power generation, marine, petroleum andindustrial applications.

Primarily responsible for mar-keting products (excluding Power Products) through dealers inthe United States and Canada.

Primarily includes activities such as: service sup-port and parts distribution to Caterpillar dealers worldwide; thedesign, manufacture and ongoing support of agricultural machin-ery and paving products; logistics services for other companies;service tools for Caterpillar dealers; and the remanufacture ofCaterpillar engines and components.

C. Segment measurement and reconciliationsPlease refer to Table VI on Pages A-24 – A-26 for financial infor-mation regarding our segments. There are several accountingdifferences between our segment reporting and our GAAP-basedexternal reporting. Our segments are measured on an accountablebasis; therefore, only those items for which divisional manage-ment is directly responsible are included in the determination ofsegment profit/(loss) and assets. The following is a list of the moresignificant accounting differences:

● Generally, liabilities are managed at the corporate leveland are not included in segment operations. Segmentaccountable assets generally include inventories, receiv-ables, property, plant and equipment.

● We account for intersegment transfers using a system ofmarket-based prices. With minor exceptions, each of theprofit centers either sells or purchases virtually all of itsproducts to or from other profit centers within the com-pany. Our high level of integration results in our inter-nally reported sales being approximately double that ofour consolidated, externally reported sales.

● Segment inventories and cost of sales are valued using acurrent cost methodology.

● Postretirement benefit expenses are split; segments aregenerally responsible for service and prior services costs,with the remaining elements of net periodic benefit costincluded as a methodology difference.

All other:

North America Marketing:

Power Products:

Latin America Marketing:

Finance & Insurance Services:

EAME Marketing:

Construction & Mining Products:

Asia/Pacific Marketing:

NOTES continued


A-24

TABLE VI — Segment Information_______________________________________________________________________________________________________________

Business Segments:Machinery and Engines________________________________________________________________________

Asia/ Construction Latin North Financing Consoli-Pacific & Mining EAME America Power America All & Insurance dated

Marketing Products Marketing Marketing Products Marketing Other Total Services Total_______ _______ _______ _______ _______ _______ _______ _______ _______ _______2002External sales and revenues .......... $ 1,660 237 2,828 1,313 5,736 5,575 1,253 18,602 1,779 $20,381Intersegment sales and revenues .. $ 4 6,728 1,784 181 3,996 152 1,926 14,771 — $14,771Total sales and revenues............... $ 1,664 6,965 4,612 1,494 9,732 5,727 3,179 33,373 1,779 $35,152Depreciation and amortization....... $ 12 209 49 25 293 — 69 657 417 $ 1,074Imputed interest expense .............. $ 12 67 30 6 124 36 66 341 540 $ 881Accountable profit (loss) ............... $ 113 431 135 72 34 64 323 1,172 268 $ 1,440Accountable assets at Dec. 31....... $ 436 2,184 912 485 4,025 1,574 2,371 11,987 17,417 $29,404Capital Expenditures ..................... $ 13 179 63 13 238 2 81 589 1,177 $ 1,766

2001External sales and revenues . . . . . . . $ 1,408 230 2,847 1,501 5,844 5,878 1,263 18,971 1,717 $ 20,688Intersegment sales and revenues. . $ 12 7,167 1,814 145 4,684 219 1,859 15,900 1 $ 15,901Total sales and revenues . . . . . . . . . . $ 1,420 7,397 4,661 1,646 10,528 6,097 3,122 34,871 1,718 $ 36,589Depreciation and amortization. . . . . $ 12 211 58 26 380 — 71 758 315 $ 1,073Imputed interest expense . . . . . . . . . . $ 13 70 27 8 117 61 67 363 673 $ 1,036Accountable profit (loss) . . . . . . . . . . $ 25 507 147 61 220 56 245 1,261 346 $ 1,607Accountable assets at Dec. 31. . . . . $ 441 2,450 826 587 3,946 1,369 2,463 12,082 15,437 $ 27,519Capital Expenditures . . . . . . . . . . . . . . . $ 10 270 59 21 335 — 140 835 858 $ 1,693

2000External sales and revenues . . . . . . . $ 1,377 222 2,768 1,303 6,247 5,861 1,062 18,840 1,527 $ 20,367Intersegment sales and revenues. . $ 7 7,070 1,885 123 4,711 173 1,907 15,876 — $ 15,876Total sales and revenues . . . . . . . . . . $ 1,384 7,292 4,653 1,426 10,958 6,034 2,969 34,716 1,527 $ 36,243Depreciation and amortization. . . . . $ 11 211 60 27 345 — 63 717 237 $ 954Imputed interest expense . . . . . . . . . . $ 9 60 27 10 101 88 65 360 703 $ 1,063Accountable profit (loss) . . . . . . . . . . $ 64 581 194 33 489 85 197 1,643 253 $ 1,896Accountable assets at Dec. 31. . . . . $ 405 2,267 906 592 3,867 1,739 2,377 12,153 14,185 $ 26,338Capital Expenditures . . . . . . . . . . . . . . . $ 8 204 67 24 254 1 94 652 659 $ 1,311

Reconciliations:(Unaudited)_____________________________________________

Machinery Financial & Consolidating Consolidatedand Engines Insurance Services Adjustments Total______________ ______________ ______________ ______________

Sales & Revenues_______________2002Total external sales and revenues from business segments . . . . . . . . . . . . . . . . . . . . $ 18,602 $ 1,779 $ — $ 20,381Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 (101) (174) (229)_______ _______ _______ _______Total sales and revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,648 $ 1,678 $ (174) $ 20,152_______ _______ _______ ______________ _______ _______ _______

2001Total external sales and revenues from business segments ............................ $ 18,971 $ 1,717 $ — $ 20,688Other............................................................................................................... 56 (72) (222) (238)_______ _______ _______ _______Total sales and revenues................................................................................. $ 19,027 $ 1,645 $ (222) $ 20,450_______ _______ _______ ______________ _______ _______ _______

2000Total external sales and revenues from business segments ............................ $ 18,840 $ 1,527 $ — $ 20,367Other............................................................................................................... 73 (62) (203) (192)_______ _______ _______ _______Total sales and revenues................................................................................. $ 18,913 $ 1,465 $ (203) $ 20,175_______ _______ _______ ______________ _______ _______ _______


Caterpillar Inc.

A-25

TABLE VI Continued — Segment Information_______________________________________________________________________________________________________________

Reconciliations:(Unaudited)_____________________________

Machinery Financial & Consolidatedand Engines Insurance Services Total______________ ______________ ______________

Profit before taxes_______________2002Total accountable profit from business segments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,172 $ 268 $ 1,440Corporate costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (242) — (242)Methodology differences:

Inventory/cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (313) — (313)Postretirement benefit expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 — 125Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32) — (32)Other methodology differences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 19 93

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 — 43_______ _______ _______Total profit before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 827 $ 287 $ 1,114_______ _______ ______________ _______ _______

2001Total accountable profit from business segments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,261 $ 346 $ 1,607Corporate costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (291) — (291)Unusual charges not allocated to business segments . . . . . . . . . . . . . . . . . . . . . . . . . . (153) — (153)Methodology differences:

Inventory/cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (107) — (107)Postretirement benefit expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 — 185Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (114) — (114)Other methodology differences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23) 11 (12)

Methodology changes in segment reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 (12) (9)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 — 63_______ _______ _______Total profit before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 824 $ 345 $ 1,169_______ _______ ______________ _______ _______

2000Total accountable profit from business segments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,643 $ 253 $ 1,896Corporate costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (232) — (232)Methodology differences:

Inventory/cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (399) — (399)Postretirement benefit expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195 — 195Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (138) — (138)Other methodology differences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 25 57

Methodology changes in segment reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 — 72Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 — 77_______ _______ _______Total profit before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,250 $ 278 $ 1,528_______ _______ ______________ _______ _______

(Unaudited)_____________________________________________Machinery Financial & Consolidating Consolidated

and Engines Insurance Services Adjustments Total______________ ______________ ______________ ______________Assets______2002Total accountable assets from business segments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,987 $ 17,417 $ — $ 29,404Items not included in segment assets:

Cash and short-term investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 163 — 309Intercompany trade receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 917 343 (1,260) —Investment in affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283 — — 283Investment in Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,961 — (1,961) —Deferred income taxes and prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,802 75 (133) 2,744Intangible assets and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,541 — — 1,541Service center assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810 — — 810

Dealer receivables double counted in segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . (1,857) — — (1,857)Liabilities included in segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 848 — — 848Inventory methodology differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,590) — — (1,590)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245 149 (35) 359_______ _______ _______ _______Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,093 $ 18,147 $ (3,389) $ 32,851_______ _______ _______ ______________ _______ _______ _______


NOTES continued


A-26

TABLE VI Continued — Segment Information_______________________________________________________________________________________________________________

Reconciliations:(Unaudited)_____________________________________________

Machinery Financial & Consolidating Consolidatedand Engines Insurance Services Adjustments Total______________ ______________ ______________ ______________

Assets______2001Total accountable assets from business segments.......................................... $ 12,082 $ 15,437 $ — $ 27,519Items not included in segment assets:

Cash and short-term investments ................................................................ 251 149 — 400Intercompany trade receivables.................................................................... 405 355 (760) —Investment in affiliated companies ............................................................... 345 — — 345Investment in Financial Products ................................................................. 1,662 — (1,662) —Deferred income taxes and prepaids ............................................................ 2,472 55 (74) 2,453Intangible assets and other assets................................................................ 1,445 — — 1,445Service center assets.................................................................................... 844 — — 844

Dealer receivables double counted in segment assets..................................... (1,757) — — (1,757)Liabilities included in segment assets............................................................. 853 — — 853Inventory methodology differences ................................................................. (1,571) — — (1,571)Other............................................................................................................... 244 (101) (17) 126_______ _______ _______ _______Total assets..................................................................................................... $ 17,275 $ 15,895 $ (2,513) $ 30,657_______ _______ _______ ______________ _______ _______ _______

2000Total accountable assets from business segments.......................................... $ 12,153 $ 14,185 $ — $ 26,338Items not included in segment assets:

Cash and short-term investments ................................................................ 206 128 — 334Intercompany trade receivables.................................................................... 559 445 (1,004) —Investment in affiliated companies ............................................................... 450 — — 450Investment in Financial Products ................................................................. 1,620 — (1,620) —Deferred income taxes and prepaids ............................................................ 2,356 30 (63) 2,323Intangible assets and other assets................................................................ 1,549 — — 1,549Service center assets.................................................................................... 453 — — 453

Dealer receivables double counted in segment assets..................................... (1,790) — — (1,790)Liabilities included in segment assets............................................................. 696 — — 696Inventory methodology differences ................................................................. (1,653) — — (1,653)Other............................................................................................................... (45) (170) (21) (236)_______ _______ _______ _______Total assets..................................................................................................... $ 16,554 $ 14,618 $ (2,708) $ 28,464_______ _______ _______ ______________ _______ _______ _______

Enterprise-wide Disclosures:External sales and revenues from products and services:

2002 2001 2000_____ _____ _____Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,975 $12,158 $11,857Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,673 6,869 7,056Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,504 1,423 1,262_______ ______ ______

Total consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,152 $20,450 $20,175_______ ______ _____________ ______ ______

Information about Geographic Areas:Sales & Revenues(1) Net property, plant and equipment___________________________ ___________________________

December 31,

2002 2001 2000 2002 2001 2000_______ _______ _______ _______ _______ _______Inside United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,291 $ 10,033 $ 10,076 $ 4,524 $ 4,351 $ 3,854Outside United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,861 10,417 10,099 2,522(2) 2,252(2) 2,097(2)_______ _______ _______ _______ _______ ______________ _______ _______ _______ _______ _______

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,152 $ 20,450 $ 20,175 $ 7,046 $ 6,603 $ 5,951_______ _______ _______ _______ _______ ______________ _______ _______ _______ _______ _______(1) Sales of machinery and engines are based on dealer location. Revenues from services provided are based on where service is rendered.(2) Amount includes $680, $681 and $628 of net property, plant and equipment located in the United Kingdom as of December 31, 2002, 2001 and 2000, respectively.

Caterpillar Inc.

A-27

● Interest expense is imputed (i.e., charged) to profit cen-ters based on their level of accountable assets. This cal-culation takes into consideration the corporate debt todebt-plus-equity ratio and a weighted-average corporateinterest rate.

● In general, foreign currency fluctuations are neutralizedfor segment reporting.

● Accountable profit is determined on a pretax basis.Reconciling items are created based on accounting differences

between segment reporting and our consolidated, external report-ing. Please refer to Table V on Page A-21 for financial infor-mation regarding significant reconciling items. Most of ourreconciling items are self-explanatory given the above explana-tions of accounting differences. However, for the reconciliationof profit, we have grouped the reconciling items as follows:

● Corporate costs: Certain corporate costs are not chargedto our segments. These costs are related to corporaterequirements and strategies that are considered to be forthe benefit of the entire organization.

● Methodology differences: See previous discussion ofsignificant accounting differences between segmentreporting and consolidated, external reporting.

● Methodology changes in segment reporting: Estimatedrestatements of prior periods to reflect changes in ourinternal-reporting methodology.

23. Alliances and acquisitions

In fourth quarter 2001, we entered a software alliance with FordMotor Company to develop a world-class logistics informationsystem to increase the speed at which service repair parts aredelivered to market.

24. Unusual charges

Asset2001 Impair- 2002 12/31/02

Charge ments Activity* Balance______ ______ ______ ______Challenger:

Asset impairments ..................... $ 32 $ (32) $ — $ —Exit costs ................................... 49 — (38) 11____ ____ ____ ____

81 (32) (38) 11____ ____ ____ ____Shrewsbury:

Asset impairments ..................... 16 (16) — —Redundancy ............................... 10 — (6) 4Exit costs ................................... 4 — (2) 2____ ____ ____ ____

30 (16) (8) 6____ ____ ____ ____U.S. employment reduction........... 34 — (34) —____ ____ ____ ____Other asset impairments ............... 8 (8) — —____ ____ ____ ____Total.............................................. $ 153 $ (56) $ (80) $ 17____ ____ ____ ________ ____ ____ ____*All amounts were paid in cash except for the U.S. employment reduction of $34 which was reclas-sified to our pension accounts. Please refer to Table II on Page A-16.

During the fourth quarter of 2001, we recorded pretax unusualcharges of $153 related to the sale of the Challenger® agriculturaltractor line to AGCO, charges related to ceasing engine produc-tion at our Shrewsbury, England plant, planned U.S. salaried andmanagement employment reductions and other asset impairmentcharges. These charges were recorded in the “Other OperatingExpenses” line in Statement 1. Planned employee reductionswere 495 for Shrewsbury and 433 for the U.S. employment reduc-tion. Challenger assets were held in our All Other segment andShrewsbury assets are held in our Power Products segment.

During 2002, we reduced the Challenger exit cost reserve by$38, primarily for cash outlays for research and developmentexpenses and manufacturing equipment in accordance with thecontract with AGCO. We reduced the Shrewsbury redundancyreserve by $6 for separation benefits for 225 employees. Asplanned, the U.S. employment reduction was achieved entirelythrough voluntary retirements. As a result, the reserve of $34was reclassified to our pension accounts upon completion of theretirement program.

Future cash outlays for contractual commitments for theChallenger of approximately $2 per year will continue through2008. Most of the diesel engine production at our Shrewsbury,England plant ceased in 2002; however, it has taken longer thananticipated to finalize the design of one replacement engine. Asa result, some diesel engine production at Shrewsbury will con-tinue through 2003. The reserve will be reduced as redundancyand exit costs are incurred through 2003.

25. Selected quarterly financial results (unaudited)

2002 Quarter___________________________1st 2nd 3rd 4th______ ______ ______ ______

Sales and revenues. . . . . . . . . . . . . . . . . . . $ 4,409 $ 5,291 $ 5,075 $ 5,377Less: Revenues . . . . . . . . . . . . . . . . . . . . . . . 365 376 375 388______ ______ ______ ______Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,044 4,915 4,700 4,989Cost of goods sold . . . . . . . . . . . . . . . . . . . 3,205 3,856 3,690 3,958______ ______ ______ ______Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . 839 1,059 1,010 1,031Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 200 213 305Profit per common share . . . . . . . . . . . . $ .23 $ .58 $ .62 $ .89Profit per common share

— diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ .23 $ .58 $ .61 $ .88

2001 Quarter___________________________1st 2nd 3rd 4th______ ______ ______ ______

Sales and revenues. . . . . . . . . . . . . . . . . . . $ 4,810 $ 5,488 $ 5,056 $ 5,096Less: Revenues . . . . . . . . . . . . . . . . . . . . . . . 349 356 357 361______ ______ ______ ______Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,461 5,132 4,699 4,735Cost of goods sold . . . . . . . . . . . . . . . . . . . 3,462 3,955 3,669 3,666______ ______ ______ ______Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . 999 1,177 1,030 1,069Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 271 205 167Profit per common share . . . . . . . . . . . . $ .47 $ .79 $ .60 $ .49Profit per common share

— diluted . . . . . . . . . . . . . . . . . . . . . . . . . . $ .47 $ .78 $ .59 $ .48

NOTES continued


A-28

26. Supplemental consolidating data

We are providing supplemental consolidating data for the purposeof additional analysis. The data has been grouped as follows:

Consolidated — Caterpillar Inc. and its subsidiaries.Machinery and Engines — primarily our manufacturing, mar-

keting and parts distribution operations, with Financial Productsaccounted for on the equity basis.

Financial Products — our finance and insurance subsidiaries,primarily Cat Financial and Cat Insurance.

Consolidating Adjustments — eliminations of transactionsbetween Machinery and Engines and Financial Products.

Because the nature of operations of Machinery and Enginesand Financial Products is different, especially with regard to theimpact on financial position and cash flow items, this data allowsreaders to better understand our company.

Supplemental Data for Results of OperationsFor The Years Ended December 31(Millions of dollars)

Supplemental consolidating data (unaudited)___________________________________________________________________________Machinery Consolidating

Consolidated and Engines(1) Financial Products Adjustments_________________________ _________________________ _________________________ _________________________2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000_______ ______ ______ _______ ______ ______ _______ ______ ______ _______ ______ ______

Sales and revenues:Sales of Machinery and Engines. . . . . . . . . . . $ 18,648 $ 19,027 $ 18,913 $ 18,648 $ 19,027 $ 18,913 $ — $ — $ — $ — $ — $ —Revenues of Financial Products . . . . . . . . . . . 1,504 1,423 1,262 — — — 1,678 1,645 1,465 (174)(2) (222)(2) (203)(2)

_______ ______ ______ _______ ______ ______ _______ ______ ______ _______ ______ ______Total sales and revenues . . . . . . . . . . . . . . 20,152 20,450 20,175 18,648 19,027 18,913 1,678 1,645 1,465 (174) (222) (203)

Operating costs:Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . 14,709 14,752 14,497 14,709 14,752 14,497 — — — — — —Selling, general and administrative

expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,531 2,567 2,367 2,176 2,229 2,099 430 389 307 (75)(3) (51)(3) (39)(3)

Research and development expenses . . . . . 656 696 649 656 696 649 — — — — — —Interest expense of Financial Products . . . . 521 657 688 — — — 538 685 739 (17)(4) (28)(4) (51)(4)

Other operating expenses . . . . . . . . . . . . . . . . . . 416 467 237 — 153 — 416 314 237 — — —_______ ______ ______ _______ ______ ______ _______ ______ ______ _______ ______ ______Total operating costs . . . . . . . . . . . . . . . . . . 18,833 19,139 18,438 17,541 17,830 17,245 1,384 1,388 1,283 (92) (79) (90)_______ ______ ______ _______ ______ ______ _______ ______ ______ _______ ______ ______

Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,319 1,311 1,737 1,107 1,197 1,668 294 257 182 (82) (143) (113)

Interest expense excludingFinancial Products. . . . . . . . . . . . . . . . . . . . . 279 285 292 279 285 292 — — — — — —

Other income (expense) . . . . . . . . . . . . . . . . . . . . 74 143 83 (1) (88) (126) (7) 88 96 82(5) 143(5) 113(5)_______ ______ ______ _______ ______ ______ _______ ______ ______ _______ ______ ______

Consolidated profit before taxes. . . . . . . . . . 1,114 1,169 1,528 827 824 1,250 287 345 278 — — —Provision for income taxes. . . . . . . . . . . . . . . . . 312 367 447 204 239 350 108 128 97 — — —_______ ______ ______ _______ ______ ______ _______ ______ ______ _______ ______ ______Profit of consolidated companies. . . . . . . . . . 802 802 1,081 623 585 900 179 217 181 — — —

Equity in profit (loss) of unconsolidatedaffiliated companies . . . . . . . . . . . . . . . . . . . (4) 3 (28) (12) (4) (31) 8 7 3 — — —

Equity in profit of Financial Products’subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 187 224 184 — — — (187)(6) (224)(6) (184)(6)

_______ ______ ______ _______ ______ ______ _______ ______ ______ _______ ______ ______Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 798 $ 805 $ 1,053 $ 798 $ 805 $ 1,053 $ 187 $ 224 $ 184 $ (187) $ (224) $ (184)_______ ______ ______ _______ ______ ______ _______ ______ ______ _______ ______ _____________ ______ ______ _______ ______ ______ _______ ______ ______ _______ ______ ______

(1) Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.(2) Elimination of Financial Products revenues earned from Machinery and Engines.(3) Elimination of expenses recorded by Machinery and Engines paid to Financial Products.(4) Elimination of interest expense recorded by Financial Products paid to Machinery and Engines.(5) Elimination of discount recorded by Machinery and Engines on receivables sold to Financial Products, and of interest earned by Machinery and Engines from Financial Products.(6) Elimination of Financial Products profit for the period reported on Machinery and Engines statement on the equity basis.

Caterpillar Inc.

A-29

Supplemental Data for Financial PositionAt December 31(Millions of dollars)

Supplemental consolidating data (unaudited)__________________________________________________Machinery Consolidating

Consolidated and Engines(1) Financial Products Adjustments________________ ________________ ________________ ________________2002 2001 2002 2001 2002 2001 2002 2001_______ ______ _______ ______ _______ ______ _______ ______

AssetsCurrent assets:

Cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309 $ 400 $ 146 $ 251 $ 163 $ 149 $ — $ —Receivables — trade and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,838 2,592 2,712 2,170 1,386 1,182 (1,260)(2) (760)(2)

Receivables — finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,748 5,849 — — 6,748 5,849 — —Deferred and refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 642 423 579 381 63 42 — —Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,328 1,211 1,356 1,220 7 8 (35)(3) (17)(3)

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,763 2,925 2,763 2,925 — — — —_______ ______ _______ ______ _______ ______ _______ ______Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,628 13,400 7,556 6,947 8,367 7,230 (1,295) (777)

Property, plant and equipment — net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,046 6,603 4,848 5,019 2,198 1,584 — —Long-term receivables — trade and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 55 66 55 — — — —Long-term receivables — finance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,714 6,267 — — 6,714 6,267 — —Investments in unconsolidated affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 747 787 398 460 349 327 — —Investments in Financial Products subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,961 1,662 — — (1,961)(4) (1,662)(4)

Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850 938 971 999 12 13 (133)(5) (74)(5)

Intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 274 277 271 4 3 — —Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,402 1,397 1,402 1,397 — — — —Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,117 936 614 465 503 471 — —_______ ______ _______ ______ _______ ______ _______ ______

Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,851 $ 30,657 $ 18,093 $ 17,275 $ 18,147 $ 15,895 $ (3,389) $ (2,513)_______ ______ _______ ______ _______ ______ _______ _____________ ______ _______ ______ _______ ______ _______ ______

LiabilitiesCurrent liabilities:

Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,175 $ 2,180 $ 64 $ 219 $ 2,906 $ 2,164 $ (795)(6) $ (203)(6)

Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,269 2,123 2,334 2,210 151 166 (216)(7) (253)(7)

Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,620 1,419 840 854 806 593 (26)(8) (28)(8)

Accrued wages, salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,178 1,292 1,161 1,276 17 16 — —Dividends payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 120 120 120 — — — —Deferred and current income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 11 35 (29) 35 40 — —Deferred liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — 259 298 (259)(9) (298)(9)

Long-term debt due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,912 3,131 258 73 3,654 3,058 — —_______ ______ _______ ______ _______ ______ _______ ______Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,344 10,276 4,812 4,723 7,828 6,335 (1,296) (782)

Long-term debt due after one year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,596 11,291 3,403 3,492 8,193 7,799 — —Liability for postemployment benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,038 3,103 4,038 3,103 — — — —Deferred income taxes and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 376 368 346 165 99 (132)(5) (69)(5)

_______ ______ _______ ______ _______ ______ _______ ______Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,379 25,046 12,621 11,664 16,186 14,233 (1,428) (851)_______ ______ _______ ______ _______ ______ _______ ______

Contingencies

Stockholders’ equityCommon stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,034 1,043 1,034 1,043 837 801 (837)(4) (801)(4)

Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,669) (2,696) (2,669) (2,696) — — — —Profit employed in the business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,849 7,533 7,849 7,533 1,232 1,046 (1,232)(4) (1,046)(4)

Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (742) (269) (742) (269) (108) (185) 108(4) 185(4)_______ ______ _______ ______ _______ ______ _______ ______

Total stockholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,472 5,611 5,472 5,611 1,961 1,662 (1,961) (1,662)_______ ______ _______ ______ _______ ______ _______ ______

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,851 $ 30,657 $ 18,093 $ 17,275 $ 18,147 $ 15,895 $ (3,389) $ (2,513)_______ ______ _______ ______ _______ ______ _______ _____________ ______ _______ ______ _______ ______ _______ ______

(1) Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.(2) Elimination of receivables between Machinery and Engines and Financial Products.(3) Elimination of Machinery and Engines insurance premiums which are prepaid to Financial Products.(4) Elimination of Financial Products equity which is accounted for on Machinery and Engines on the equity basis.(5) Reclassification of Financial Products deferred tax liability to a deferred tax asset on a consolidated basis.(6) Elimination of Financial Products short-term borrowings from Machinery and Engines.(7) Elimination of payables between Machinery and Engines and Financial Products.(8) Elimination of prepaid insurance in Financial Products’ accrued expenses.(9) Elimination of Financial Products deferred liabilities with Machinery and Engines.

NOTES continued


A-30

Supplemental Data for Statement of Cash FlowsFor The Years Ended December 31(Millions of dollars)

Supplemental consolidating data (unaudited)__________________________________________________Machinery Consolidating

Consolidated and Engines(1) Financial Products Adjustments________________ ________________ ________________ ________________2002 2001 2002 2001 2002 2001 2002 2001_______ ______ _______ ______ _______ ______ _______ ______

Cash flow from operating activities:Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 798 $ 805 $ 798 $ 805 $ 187 $ 224 $ (187)(2) $ (224)(2)

Adjustments for non-cash items:Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,220 1,169 785 835 435 334 — —Undistributed profit of Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (187) (124) — — 187(3) 124(3)

Unusual charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 153 — 153 — — — —Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306 344 148 308 144 25 14(4) 11(4)

Changes in assets and liabilities:Receivables — trade and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50) 99 125 166 (138) (49) (37)(4) (18)(4)

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 (211) 162 (211) — — — —Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 (160) 114 (203) 25 40 25(4) 3(4)

Other — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (234) (212) (249) (218) (4) 16 19(4) (10)(4)_______ ______ _______ ______ _______ ______ _______ ______

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,366 1,987 1,696 1,511 649 590 21 (114)_______ ______ _______ ______ _______ ______ _______ ______

Cash flow from investing activities:Capital expenditures — excluding equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (728) (1,100) (693) (1,071) (35) (29) — —Expenditures for equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,045) (868) (5) (38) (1,040) (830) — —Proceeds from disposals of property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561 356 88 32 473 324 — —Additions to finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,338) (16,284) — — (15,338) (16,284) — —Collections of finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,866 12,367 — — 11,866 12,367 — —Proceeds from sale of finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,310 3,079 — — 2,310 3,079 — —Net intercompany borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (571) 105 14 103 557(5) (208)(5)

Investments and acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (294) (405) (24) (110) (270) (295) — —Other — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40) (72) (14) (41) (62) (45) 36(6) 14(6)

_______ ______ _______ ______ _______ ______ _______ ______Net cash used for investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,708) (2,927) (1,219) (1,123) (2,082) (1,610) 593 (194)_______ ______ _______ ______ _______ ______ _______ ______

Cash flow from financing activities:Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (481) (474) (481) (474) — (105) — 105(7)

Common stock issued, including treasury shares reissued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 6 10 6 36 14 (36)(6) (14)(6)

Treasury shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (43) — (43) — — — —Net intercompany borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (14) (103) 571 (105) (557)(5) 208(5)

Proceeds from long-term debt issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,137 4,062 248 681 3,889 3,381 — —Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,339) (2,953) (225) (354) (3,114) (2,599) — —Short-term borrowings — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (102) 420 (155) (38) 53 458 — —_______ ______ _______ ______ _______ ______ _______ ______

Net cash provided by (used for) financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225 1,018 (617) (325) 1,435 1,044 (593) 299_______ ______ _______ ______ _______ ______ _______ ______Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 (12) 35 (18) 12 (3) (21)(8) 9(8)

_______ ______ _______ ______ _______ ______ _______ ______Increase (decrease) in cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (91) 66 (105) 45 14 21 — —

Cash and short-term investments at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 334 251 206 149 128 — —_______ ______ _______ ______ _______ ______ _______ ______

Cash and short-term investments at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309 $ 400 $ 146 $ 251 $ 163 $ 149 $ — $ —_______ ______ _______ ______ _______ ______ _______ _____________ ______ _______ ______ _______ ______ _______ ______

(1) Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.(2) Elimination of Financial Products profit after tax due to equity method of consolidation.(3) Non-cash adjustment for the undistributed earnings from Financial Products.(4) Elimination of non-cash adjustments and changes in assets and liabilities related to consolidated reporting.(5) Net proceeds and payments to/from Machinery and Engines and Financial Products.(6) Change in investment and common stock related to Financial Products.(7) Elimination of dividends paid to/from Machinery and Engines and Financial Products.(8) Elimination of the effect of exchange on intercompany balances.

Five-year Financial Summary Caterpillar Inc.(Dollars in millions except per share data)

A-31

Years ended December 31, 2002 2001 2000 1999 1998______ ______ ______ ______ ______

Sales and revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,152 20,450 20,175 19,702 20,977

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,648 19,027 18,913 18,559 19,972

Percent inside the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . 45% 49% 50% 50% 51%

Percent outside the United States. . . . . . . . . . . . . . . . . . . . . . . . . . 55% 51% 50% 50% 49%

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,504 1,423 1,262 1,143 1,005

Profit(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 798 805 1,053 946 1,513

Profit per common share(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.32 2.35 3.04 2.66 4.17

Profit per common share — diluted(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.30 2.32 3.02 2.63 4.11

Dividends declared per share of common stock . . . . . . . . . . . . . . . . . $ 1.400 1.390 1.345 1.275 1.150

Return on average common stock equity . . . . . . . . . . . . . . . . . . . . . . . . . 14.4% 14.4% 19.0% 17.9% 30.9%

Capital expenditures:

Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 728 1,100 928 913 982

Equipment leased to others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,045 868 665 490 344

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,220 1,169 1,063 977 893

Research and engineering expenses(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 854 898 854 814 838

As a percent of sales and revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2% 4.4% 4.2% 4.1% 4.0%

Wages, salaries and employee benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,360 4,272 4,029 4,044 4,146

Average number of employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,973 70,678 67,200 66,225 64,441

December 31,

Total assets:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,851 30,657 28,464 26,711 25,128

Machinery and Engines(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,093 17,275 16,554 16,158 15,619

Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,147 15,895 14,618 12,951 11,648

Long-term debt due after one year:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,596 11,291 11,334 9,928 9,404

Machinery and Engines(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,403 3,492 2,854 3,099 2,993

Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,193 7,799 8,480 6,829 6,411

Total debt:

Consolidated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,683 16,602 15,067 13,802 12,452

Machinery and Engines(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,725 3,784 3,427 3,317 3,102

Financial Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,753 13,021 11,957 10,796 9,562

Percent of total debt to total debt and stockholders’ equity(Machinery and Engines) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41% 40% 38% 38% 38%

(1) As discussed in Note 9, in 2002 we changed the manner in which we account for goodwill and other intangible assets upon the adoption of SFAS 142.(2) Computed on weighted-average number of shares outstanding.(3) Research and development expenses plus engineering expense incurred during the early production phase and ongoing efforts to improve existing products.(4) Represents Caterpillar Inc. and its subsidiaries with Financial Products accounted for on the equity basis.

Transactions between Machinery and Engines and Financial Products have been eliminated to arrive at consolidated data.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FOURTH QUARTER 2002COMPARED WITH FOURTH QUARTER 2001

Fourth-quarter 2002 sales and revenues were $5.38 billion com-pared to $5.10 billion in 2001. The increase of more than 5 percentwas due to a $180 million improvement in price realization, abouthalf of which was due to the favorable impact of currency andhigher sales volume. Price realization is defined as the net impactof price changes, sales variances and currency fluctuations on sales.Sales variances include items such as warranty, special retail andwholesale incentive programs and manufacturer and cash discounts.Profit for the fourth quarter 2002 was $305 million or 88 centsper share compared to $167 million or 48 cents per share in thefourth quarter 2001. Excluding the $97 million after-tax impactof unusual charges recorded in 2001 for sale of the Challenger®

agricultural tractor line, plant closing and consolidations andcosts for planned employment reductions, earnings per share

increased 16 percent. The $90 million favorable impact of improvedprice realization (excluding currency) plus the impact of lowerSG&A and R&D expenses were partially offset by continuingmanufacturing inefficiencies related to volume shifts at mostU.S. engine manufacturing facilities.

Application of the goodwill non-amortization provisions ofSFAS 142 resulted in a favorable pretax impact on earnings of$22 million for the fourth quarter. This was partially offset by a$14 million pretax increase in pension and other postretirementbenefit expense. The increase was a result of lower plan asset returnsin recent years and assumed discount rates used in 2002 comparedto 2001, partially offset by the favorable pretax impact of other post-retirement benefit plan changes made in the second quarter. Thesechanges impacted U.S. employees only and included an increasein retiree cost sharing of health care benefits, elimination of com-pany payments for Medicare part B premiums and significantreductions in retiree life insurance.

It is our objective to provide the most meaningful disclosures inour Management’s Discussion and Analysis in order to explainsignificant changes in our company’s results of operations andliquidity and capital resources. As discussed in Note 22A, “Basisfor segment information” on Page A-22, our segment financialinformation is not based on generally accepted accounting prin-ciples and it is not intended to measure contributions to enterpriseresults. Therefore, it is impractical for us to try to discuss our com-pany’s results of operations and liquidity and capital resourcessolely based on segment information. Where practical, we havelinked our discussions to segment information provided in Table VIon Pages A-24 – A-26 (see Reconciliation of Machinery andEngine Sales by Geographic Region to External Sales by MarketingSegment on Page A-33). Our discussions will focus on consolidatedresults and our three principal lines of business as described below:

Consolidated — represents the consolidated data ofCaterpillar Inc. and all its subsidiaries (affiliated companies thatare more than 50% owned).

Machinery — design, manufacture and marketing of con-struction, mining, agricultural and forestry machinery — trackand wheel tractors, track and wheel loaders, pipelayers, motor

graders, wheel tractor-scrapers, track and wheel excavators,backhoe loaders, mining shovels, log skidders, log loaders, off-highway trucks, articulated trucks, paving products, telescopichandlers, skid steer loaders and related parts.

Engines — design, manufacture and marketing of engines forCaterpillar Machinery, electric power generation systems; on-high-way vehicles and locomotives; marine, petroleum, construction,industrial, agricultural and other applications; and related parts.Reciprocating engines meet power needs ranging from 5 to over22,000 horsepower (4 to over 16 200 kilowatts). Turbines rangefrom 1,600 to 19,500 horsepower (1 000 to 14 500 kilowatts).

Financial Products — financing to customers and dealers forthe purchase and lease of Caterpillar and other equipment, aswell as some financing for Caterpillar sales to dealers. Financingplans include operating and finance leases, installment sale con-tracts, working capital loans and wholesale financing plans. Thedivision also provides various forms of insurance to customersand dealers to help support the purchase and lease of our equip-ment. This line of business consists primarily of CaterpillarFinancial Services Corporation (Cat Financial) and CaterpillarInsurance Holdings, Inc. (Cat Insurance) and their subsidiaries.

Machinery and Engines Sales Table

(Millions of dollars) Total North America EAME* Latin America** Asia/Pacific

Fourth Quarter 2002Machinery . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,151 $ 1,643 $ 878 $ 186 $ 444Engines***. . . . . . . . . . . . . . . . . . . . . . . . 1,838 728 589 270 251_______ _______ _______ _______ _______

$ 4,989 $ 2,371 $ 1,467 $ 456 $ 695_______ _______ _______ _______ ______________ _______ _______ _______ _______Fourth Quarter 2001Machinery . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,799 $ 1,417 $ 809 $ 222 $ 351Engines***. . . . . . . . . . . . . . . . . . . . . . . . 1,936 816 562 348 210_______ _______ _______ _______ _______

$ 4,735 $ 2,233 $ 1,371 $ 570 $ 561_______ _______ _______ _______ ______________ _______ _______ _______ _______

***Europe, Africa & Middle East and Commonwealth of Independent States***Latin America includes Mexico*** Does not include internal engine transfers of $316 million and $296 million in fourth quarter 2002 and fourth quarter 2001, respectively. Internal engine trans-

fers are valued at prices comparable to those for unrelated parties.

A-32

Caterpillar Inc.

A-33

MACHINERY AND ENGINESMachinery sales were $3.15 billion, an increase of $352 mil-lion or 13 percent from fourth quarter 2001. Sales volume forthe quarter increased 9 percent from a year ago, mainly due toyear-over-year changes in dealer inventories. In the fourth quar-ter of 2001, dealers decreased machine inventories about 12 per-cent. In the fourth quarter of 2002, dealer inventories increased3 percent; however, year-end 2002 inventories compared to cur-rent selling rates were lower than year-earlier levels in all regions.

Engine sales were $1.84 billion, a decrease of $98 million or 5 per-cent from fourth quarter 2001. Sales volume for the quarter decreased9 percent from a year ago. While on-highway truck and bus enginesales were flat, engine sales into the electric power, petroleumand marine sectors decreased about 10 percent due to reducedcorporate profits and continued business investment uncertain-ties in these industries.

Operating Profit TableFourth Quarter

(Millions of dollars) 2002 2001

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 351 $ 137Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 39______ ______

$ 377 $ 176*______ ____________ ______*Includes $153 million of unusual charges for the sale of the Challenger® agri-cultural tractor line, plant closing and consolidations and costs for plannedemployment reductions. The unusual charges were split $98 million and$55 million to machinery and engines, respectively.

Caterpillar operations are highly integrated; therefore, the company uses anumber of allocations to determine lines of business operating profit.

Machinery operating profit increased $214 million from fourthquarter 2001. Excluding the $98 million impact of unusual charges,operating profit increased $116 million or 49 percent. Higher salesvolume contributed about $60 million of the improvement, withthe remainder due to improved price realization (excluding theimpact of currency) and cost reduction.

Engine operating profit decreased $13 million from fourthquarter 2001. Excluding the $55 million impact of unusualcharges, operating profit decreased $68 million or 72 percent.Lower sales volume of large reciprocating engines, volume-related manufacturing inefficiencies and non-conformance penal-ties for on-highway truck and bus engines reduced operatingprofit by approximately $110 million. This was partially offset byimproved price realization (excluding currency) and cost reduction.

Interest expense was $10 million higher than a year ago primar-ily due to increased long-term borrowings and less capitalizedinterest year-over-year.

Other income/expense was income of $43 million compared toincome of $42 million last year.

FINANCIAL PRODUCTSFinancial Products revenues for the fourth quarter were $431 mil-lion, up $16 million or 4 percent compared with fourth quarter2001. The favorable impact of approximately $60 million due tothe continued portfolio growth of finance receivables and leases atCat Financial was partially offset by the approximately $44 millionunfavorable impact of generally lower interest rates on financereceivables.

Reconciliation of Machinery and Engine Sales by Geographic Region to External Sales by Marketing Segment

(Millions of dollars) 2002 2001 2000

North America Geographic Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,480 $ 10,260 $ 10,492Engine sales included in the Power Products segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,962) (3,463) (3,880)Company owned dealer sales included in the All Other segment . . . . . . . . . . . . . . . . . . . . . . . . . . . (350) (438) (350)North America Geographic Region sales which are included

in the All Other segment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (339) (263) (197)Other*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (254) (218) (204)_______ _______ _______North America Marketing external sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,575 $ 5,878 $ 5,861_______ _______ ______________ _______ _______

EAME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,178 $ 5,114 $ 5,041Power Products sales not included in the EAME Marketing segment . . . . . . . . . . . . . . . . . . . . . . (1,611) (1,750) (1,817)Other*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (739) (517) (456)_______ _______ _______EAME Marketing external sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,828 $ 2,847 $ 2,768_______ _______ ______________ _______ _______

Latin America Geographic Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,598 $ 1,639 $ 1,431Power Products sales not included in the Latin America Marketing segment . . . . . . . . . . . . . . (639) (280) (247)Other*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354 142 119_______ _______ _______Latin America Marketing external sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,313 $ 1,501 $ 1,303_______ _______ ______________ _______ _______

Asia/Pacific Geographic Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,392 $ 2,014 $ 1,949Power Products sales not included in the Asia/Pacific Marketing segment . . . . . . . . . . . . . . . . (524) (351) (303)Other*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (208) (255) (269)_______ _______ _______Asia/Pacific Marketing external sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,660 $ 1,408 $ 1,377_______ _______ ______________ _______ _______

*Mostly represents external sales of the Construction & Mining Products and the All Other segments.

MANAGEMENT’S DISCUSSION AND ANALYSIS continued

A-34

Before-tax profit for Financial Products was $68 million,down $14 million or 17 percent from fourth quarter 2001, pri-marily due to lower gains on the securitization of receivables of$9 million before tax at Cat Financial and lower income (mostlyinvestment income) of $9 million before tax at Cat Insurance.

INCOME TAXESFourth-quarter tax expense reflects an estimated annual tax rateof 28 percent for 2002 and 32 percent for 2001 resulting from achange in the geographic mix of profits.

UNCONSOLIDATED AFFILIATED COMPANIESThe company’s share of unconsolidated affiliated companies’profits increased $6 million from fourth quarter a year ago, primarilydue to improved profitability of Shin Caterpillar Mitsubishi Ltd.

2002 COMPARED WITH 2001For the full year, the company achieved sales and revenues of$20.15 billion compared to $20.45 billion in 2001. This decline ofabout 1 percent was due to lower sales volume of about $680 mil-lion, partially offset by improved price realization of approximately$300 million. About half of the price realization improvementwas due to the favorable impact of the weaker U.S. dollar on salesin other currencies, primarily the euro and Australian dollar.

Profit for the full year was $798 million or $2.30 per share,compared to $805 million or $2.32 per share, down less than1 percent from 2001. Excluding the $97 million after-tax impactof the unusual charges recorded in the fourth quarter of 2001,profit declined 12 percent. The combined effect of favorable

price realization and net favorable currency of approximately$250 million was more than offset by lower sales volume andrelated manufacturing inefficiencies.

Application of the goodwill non-amortization provisions ofSFAS 142 resulted in a favorable before-tax impact on 2002earnings of $85 million. This was more than offset by a $93 mil-lion before-tax increase in pension and other postretirement ben-efit expense. This increase was a result of lower plan asset returnsin recent years, partially offset by the favorable before-tax impactof other postretirement benefit plan changes made in the secondquarter of 2002. These changes impacted U.S. employees onlyand included an increase in retiree cost sharing of health carebenefits, elimination of company payments for Medicare part Bpremiums and significant reductions in retiree life insurance.

MACHINERY AND ENGINESMachinery sales were $11.98 billion, a decrease of $183 millionor 2 percent from 2001. Sales volume for the year decreased 4 per-cent from 2001. Higher sales in Asia/Pacific were due to higherretail demand. Sales in North America, EAME and Latin Americadeclined due to lower retail demand. Sales were also affected bychanges in dealer inventories. In 2001, dealers decreased machineinventories about 7 percent. In 2002, dealer inventories increasedby about 3 percent; however, year-end 2002 inventories com-pared to current selling rates were lower than year-earlier levelsin all regions.

Engine sales were $ 6.67 billion, a decrease of $196 million or3 percent from 2001. Sales volume for the year decreased 4 per-cent from 2001. Caterpillar truck engine sales rose 36 percentdue to a surge in demand from North American truck OEMs for

Machinery and Engines Sales by Geographic Region

(Millions of dollars) Total North America EAME* Latin America** Asia/Pacific

2002Machinery . . . . . . . . . . . . . . . . . . . . . . . . . $11,975 $ 6,517 $ 3,156 $ 818 $ 1,484Engines***. . . . . . . . . . . . . . . . . . . . . . . . 6,673 2,963 2,022 780 908_______ _______ _______ _______ _______

$18,648 $ 9,480 $ 5,178 $ 1,598 $ 2,392_______ _______ _______ _______ ______________ _______ _______ _______ _______


$19,027 $10,260 $ 5,114 $ 1,639 $ 2,014_______ _______ _______ _______ ______________ _______ _______ _______ _______


$18,913 $10,492 $ 5,041 $ 1,431 $ 1,949_______ _______ _______ _______ ______________ _______ _______ _______ _______

***Europe, Africa & Middle East and Commonwealth of Independent States

***Latin America includes Mexico

***Does not include internal engine transfers of $1,286 million, $1,231 million and $1,356 million in 2002, 2001 and 2000, respectively. Internal engine trans-fers are valued at prices comparable to those for unrelated parties.

Caterpillar Inc.

A-35

heavy-duty truck engines prior to the October 2002 emissionsdeadline and improved truck fleet operating profits. Sales intothe petroleum sector increased 4 percent as higher sales of tur-bine engines more than offset a decline in sales of reciprocatingengines. These increases were more than offset by 30 percentlower sales to the electric power sector, where financial uncer-tainties and depressed operating profits within the electric util-ity, technology and telecommunications industries impacteddemand.

Operating Profit Table

(Millions of dollars) 2002 2001 2000

Machinery . . . . . . . . . . . . . . . . . . . . . . . . . $ 932 $1,849 $1,001Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 348 667______ ______ ______

$1,107 $1,197* $1,668______ ______ ____________ ______ ______

*Includes $153 million of unusual charges for the sale of the Challenger® agri-cultural tractor line, plant closing and consolidations and costs for plannedemployment reductions. The unusual charges were split $98 million and$55 million to machinery and engines, respectively.

Caterpillar operations are highly integrated; therefore, the company uses anumber of allocations to determine lines of business operating profit.

Machinery operating profit increased $83 million, or 10 percentfrom 2001. Excluding the $98 million impact of unusual charges,operating profit decreased $15 million or 2 percent. The favorableprofit impact of price realization, net impact of currency andlower SG&A expenses were more than offset by the profit impactof lower sales volume and related manufacturing inefficiencies.

Application of the goodwill non-amortization provisions ofSFAS 142 resulted in a favorable impact on 2002 machineryoperating profit of approximately $10 million. This was morethan offset by a $62 million before-tax increase in pension andother postretirement benefit expense.

Engine operating profit decreased $173 million, or 50 percentfrom 2001. Excluding the $55 million impact of unusual charges,operating profit decreased $228 million or 57 percent. Increasedturbine and on-highway truck and bus engine volumes andimproved price realization improved operating profit by approxi-mately $140 million. These favorable items were more than offsetby the profit impact of lower sales volume of large reciprocatingengines, volume-related manufacturing inefficiencies and non-conformance penalties for on-highway truck and bus engines.

Application of the goodwill non-amortization provisions ofSFAS 142 resulted in a favorable impact on 2002 engine operat-ing profit of approximately $75 million. This was partially offsetby a $31 million before-tax increase in pension and other postre-tirement benefit expense.

Interest expense was $6 million lower in 2002 compared to 2001primarily due to lower interest rates on short-term borrowings.

Other income/expense improved by $87 million year-over-yearprimarily due to the absence of foreign currency losses and lowerexpenses related to the sales of receivables to Cat Financial.

Table of Supplemental Information(Millions of dollars) 2002 2001 2000

Identifiable Assets:Machinery . . . . . . . . . . . . . . . . . . . . . $ 10,793 $ 10,121 $ 9,602Engines. . . . . . . . . . . . . . . . . . . . . . . . . 7,300 7,154 6,952_______ _______ _______

Total . . . . . . . . . . . . . . . . . . . . . . . . $ 18,093 $ 17,275 $ 16,554_______ _______ ______________ _______ _______Capital Expenditures:Machinery . . . . . . . . . . . . . . . . . . . . . $ 393 $ 616 $ 573Engines. . . . . . . . . . . . . . . . . . . . . . . . . 305 493 327_______ _______ _______

Total . . . . . . . . . . . . . . . . . . . . . . . . $ 698 $ 1,109 $ 900_______ _______ ______________ _______ _______Depreciation andAmortization:Machinery . . . . . . . . . . . . . . . . . . . . . $ 437 $ 424 $ 419Engines. . . . . . . . . . . . . . . . . . . . . . . . . 348 411 394_______ _______ _______

Total . . . . . . . . . . . . . . . . . . . . . . . . $ 785 $ 835 $ 813_______ _______ ______________ _______ _______

Caterpillar operations are highly integrated; therefore, we use a number of allo-cations to determine lines of business financial data.

FINANCIAL PRODUCTSFinancial Products revenues for 2002 were $1.68 billion, up$33 million or 2 percent compared with 2001. A favorable impactof approximately $205 million due to a $2.1 billion increase inthe portfolio at Cat Financial and an increase in third party insur-ance premiums and fees earned of approximately $21 million atCat Insurance was mostly offset by the impact of generally lowerinterest rates on finance receivables at Cat Financial.

Before-tax profit was $287 million, down $58 million or 17 per-cent from 2001. A $41 million before-tax charge of “other thantemporary” declines in the market value of securities in the invest-ment portfolio at Cat Insurance resulted from poor overall marketperformance. Also, there was less securitization-related incomeof approximately $28 million before tax and higher operatingexpenses of $17 million before tax at Cat Financial. These itemswere partially offset by higher rental income, net of depreciation,of $30 million before tax at Cat Financial and higher underwritingincome of $7 million before tax at Cat Insurance.

INCOME TAXESTax expense reflects an estimated annual tax rate of 28 percentfor 2002 and 32 percent for 2001 resulting from a change in thegeographic mix of profits.

UNCONSOLIDATED AFFILIATED COMPANIESThe company’s share of unconsolidated affiliated companies’profits decreased $7 million from a year ago, primarily due tolosses at Shin Caterpillar Mitsubishi Ltd. resulting from depressedconstruction equipment demand in Japan.

UPDATE — 2001 UNUSUAL CHARGESIn 2001, we recorded unusual charges of $153 million ($97 mil-lion after tax). These charges were for the sale of the Challenger®

agricultural tractor line, plant closing and consolidations andcosts for planned employment reductions.

During 2002, we reduced the Challenger exit cost reserve by$38 million, primarily for cash outlays for research and develop-ment expenses and manufacturing equipment in accordance with


A-36

the contract with AGCO. We reduced the Shrewsbury redundancyreserve by $6 million for separation benefits for 225 employees.As planned, the U.S. employment reduction was achieved entirelythrough voluntary retirements. As a result, the reserve of $34 mil-lion was reclassified to our pension accounts upon completion ofthe retirement program.

Future cash outlays for contractual commitments for theChallenger of approximately $2 million per year will continuethrough 2008. Most of the diesel engine production at ourShrewsbury, England plant ceased in 2002; however, it has takenlonger than anticipated to finalize the design of one replacementengine. As a result, some diesel engine production at Shrewsburywill continue through 2003. The reserve will be reduced as redun-dancy and exit costs are incurred through 2003.

Unusual ChargesAsset

2001 Impair- 2002 12/31/02(Millions of dollars) Charge ments Activity* BalanceChallenger:

Asset impairments............... $ 32 $ (32) $ — $ —Exit costs ............................. 49 — (38) 11____ ____ ____ ____

81 (32) (38) 11Shrewsbury:

Asset impairments............... 16 (16) — —Redundancy......................... 10 — (6) 4Exit costs ............................. 4 — (2) 2____ ____ ____ ____

30 (16) (8) 6____ ____ ____ ____U.S. employment reduction ... 34 — (34) —____ ____ ____ ____Other asset impairments ........ 8 (8) — —____ ____ ____ ____Total ....................................... $153 $ (56) $ (80) $ 17____ ____ ____ ________ ____ ____ ____*All amounts were paid in cash except for the U.S. employment reduction of$34 million, which was reclassified to our pension accounts.

SUPPLEMENTAL INFORMATION

Dealer Machine Sales to End Users andDeliveries to Dealer Rental OperationsDealer sales (including both sales to end users and deliveries todealer rental operations) in North America declined 10 percentfrom 2001, the same as industry demand. Caterpillar’s share ofindustry sales remained at year earlier levels. Dealer sales declinedin both the United States, down 11 percent, and Canada, down5 percent. For the region, sales increased 2 percent in the heavyconstruction sector due to higher sales to the U.S. military andfor airport construction. In addition, sales to highway construc-tion remained strong. Sales to the quarry and aggregates sectorwere up 10 percent, due primarily to an increase in Caterpillar’sshare of industry sales. Sales growth in these two sectors wasmore than offset by a 37 percent reduction in sales to mining,especially coal. Sales to the general construction sector declined9 percent due to reductions in dealer rental deliveries as well asreduced purchases by residential and non-residential builders.

Dealer sales in EAME declined 9 percent due to 14 percentlower sales in Europe. Sales increased in the Commonwealth ofIndependent States, up 7 percent, and Africa and Middle East, up1 percent. For the region, sales to the heavy construction sectorincreased about 5 percent due mostly to increased purchases byhighway contractors. Sales to quarry and aggregate producers

were up 6 percent as well. These increases were more than off-set by 21 percent lower sales to the general construction sector.Sales were also lower to industrial, down 22 percent; and min-ing, down 13 percent.

In Asia/Pacific, dealer sales increased 7 percent, led by a strong45 percent gain in China. For the region, sales were 28 percenthigher in the heavy construction sector and industrial sector salesgrew 43 percent. Sales also increased to the general construc-tion sector, up 7 percent; and the quarry and aggregates sector,up 14 percent. These gains more than offset 13 percent lowersales to the mining sector, resulting from sharp cutbacks in pur-chases by coal mining companies.

Dealer sales in Latin America declined 5 percent. Higher salesin Brazil, up 14 percent and Mexico, up 20 percent, were morethan offset by declines in Argentina, down 88 percent, Peru,down 34 percent and Chile, down 19 percent. For the region,sales were up 8 percent in the heavy construction sector, mostlydue to increased pipeline and highway construction. This gainwas more than offset by 25 percent lower sales to the miningsector, especially metals, as well as a 6 percent decline in salesto the general construction sector.

Dealer Inventories of New MachinesWorldwide dealer new machine inventories at year-end 2002were about 3 percent higher than 2001 levels. Inventories increasedin North America, up 6 percent; Asia/Pacific, up 9 percent; andEAME, up 4 percent. Dealer inventory declined 20 percent inLatin America. Despite the overall increase in dealer invento-ries, inventories compared to current selling rates were lowerthan year-earlier levels in all regions.

Engine Sales to End Users and OEMsWorldwide engine sales to end users and OEMs were up 1 percentin 2002. Sales to the on-highway truck and bus sector rose 38 per-cent and sales to the petroleum sector rose 5 percent, more thanoffsetting 21 percent lower sales to the electric power sector and6 percent lower sales to the marine sector. In North America,Caterpillar sales of on-highway truck and bus engines rose 38 per-cent but were more than offset by lower sales in electric power,36 percent; petroleum, 32 percent; and marine, 42 percent. Saleswere impacted by weak corporate profits, continuing economicuncertainties and delayed new investments. Caterpillar widenedits leadership position in the North American on-highway truckand bus industry. The heavy-duty truck industry and Caterpillarheavy-duty truck engine demand was substantially higher thanwe originally expected for 2002. We estimate about 40,000 extraheavy-duty trucks were built in 2002 to accommodate an artifi-cial surge in customer demand for trucks with engines builtbefore the October 2002 emissions deadline. This artificial demandadded an estimated $200 million to Caterpillar’s 2002 truck enginesales, representing about 50 percent of the total year-over-yearsales increase to the on-highway truck and bus sector.

In EAME, overall sales declined 3 percent, with a 30 percentincrease in demand for larger engines used in the petroleum sec-tor more than offset by 16 and 14 percent lower sales into theelectric power and marine sectors, respectively. Electric powerand marine engine sales were impacted by weakening economictrends in Western Europe and increased business uncertaintywhich delayed new business investment decisions.

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Sales in Asia/Pacific rose 20 percent with sales gains in all sec-tors except electric power where sales declined 17 percent. Salesof large engines used in the petroleum sector surged 62 percent,as developing countries in Asia/Pacific and Latin America increasedoil and gas exploration and development to raise local energy pro-duction and offset higher costs of imported fuels. Sales in LatinAmerica increased 60 percent with sales gains in all sectors andpronounced strength in large engine sales into the petroleum andmarine sectors, which rose 48 and 242 percent, respectively.

2001 COMPARED WITH 2000

Sales and revenues for 2001 were $20.45 billion, 1 percent morethan 2000. The increase was due to higher sales volume of about$390 million and increased Financial Products revenues of approxi-mately $160 million, which were partially offset by approximately$275 million of lower price realization. More than 90 percent ofthe price realization detriment was due to the unfavorable impactof the stronger U.S. dollar on sales in other currencies, primarilythe euro and Australian dollar.

Profit of $805 million, including unusual charges of $153 million($97 million after tax), was down $248 million. These chargeswere for the sale of the Challenger® agricultural tractor line, plantclosing and consolidations and costs for planned employmentreductions. Excluding unusual charges, profit was $902 million,down $151 million or 14 percent. The combined effect of highersales volume and a net favorable currency impact of approximately$225 million was more than offset by cost inefficiencies result-ing from sharp volume shifts at some manufacturing facilitiesand higher SG&A expenses related to spending for future growthand improving long-term cost structure. The net favorable cur-rency impact occurred as the negative impact of currency on saleswas more than offset by a positive impact on costs.

MACHINERY AND ENGINESMachinery sales were $12.16 billion, an increase over 2000 of$301 million resulting from a 3 percent increase in sales volume.Sales were higher in all regions except Latin America, which wasabout flat. In North America, sales increases due to higher shareof industry sales and a slower rate of dealer inventory reductionmore than offset reduced industry demand. In EAME and Asia/Pacific, improved retail demand more than offset the impact ofreductions in dealer inventory. Sales in Latin America remainednear 2000 levels as higher retail demand offset reductions indealer inventory.

Engine sales were $6.87 billion, a decrease of $187 million or3 percent from 2000 even though sales volume was flat. Unfavor-able price realization resulting from competitive pressures inNorth America combined with the unfavorable impact of thestronger U.S. dollar on sales in other currencies caused the salesdecline. Higher sales in the electric power, petroleum and marinesectors were offset by a substantial drop in truck engine sales.

Machinery operating profit decreased $152 million from 2000.The favorable impact of higher sales volume and the net favor-able impact of currency were more than offset by higher costs,including unusual charges of $98 million, employment-relatedcost increases and higher energy costs.

Engine operating profit decreased $319 million from 2000.The decline was primarily due to lower price realization, man-ufacturing inefficiencies related to sharp swings in productionlevels and unusual charges of $55 million.Interest expense was $7 million lower than a year ago as lowereffective borrowing rates more than offset the impact of higherborrowings.Other income/expense improved by $38 million due to lowerforeign currency losses (primarily the British pound) in 2001.

FINANCIAL PRODUCTSRevenues for 2001 were a record $1.65 billion, up $180 millionor 12 percent compared with 2000 (excluding revenue transac-tions with Machinery and Engines, revenues increased $161 mil-lion or 13 percent). The increase resulted primarily from a$1.1 billion increase in the portfolio at Cat Financial.

Before-tax profit increased $67 million or 24 percent from 2000.Record profit at Cat Financial resulted from an approximate one-percentage point increase in the spread on the receivables port-folio and increased gains of $31 million on sales of receivables.

INCOME TAXESExcluding the tax effect of the unusual charges reported in 2001and the favorable tax adjustment of $39 million at CaterpillarBrasil Ltda. in 2000, tax expense in both years reflects an effec-tive tax rate of 32 percent.

UNCONSOLIDATED AFFILIATED COMPANIESThe company’s share of unconsolidated affiliated companies’results increased $31 million from a year ago, primarily due tostronger results at Shin Caterpillar Mitsubishi Ltd.

2001 UNUSUAL CHARGESIn December 2001, we signed an agreement with AGCO to sellthe design, assembly and marketing of the new MT Series ofCaterpillar’s Challenger high-tech farm tractors during the firstquarter of 2002. By selling the Challenger we will avoid the sub-stantial new investment in distribution that would be required tomake this product profitable. The sale will also provide our dis-tribution network the expanded line of agricultural products itneeds to be successful. A total charge of $81 million was recog-nized for the Challenger sale. These charges reflect the provisionsof the agreement with AGCO and are comprised of the following:

● $32 million for write-downs of land, buildings and equip-ment at our DeKalb, Illinois, facility to fair market valuebased on the negotiated contract price with AGCO.

● $49 million for exit costs. The contract with AGCO requiresthat we complete the design of the new Challenger tractor,ensure a successful market launch and pay for the remain-ing capital assets required for the production of the tractor.These amounts reflect our estimate of costs to fulfill ourcontract obligations and will be incurred in 2002. Alsoincluded in exit costs are contractual obligations that willremain after the sale to AGCO but will provide no ben-efit to Caterpillar. These obligations range from one toseven years.

In December 2001, we announced plans to cease productionof diesel engines at the Perkins Engines Shrewsbury, Englandplant by the end of 2002. Production will be reallocated to other

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Caterpillar engine facilities to better leverage technology andcapacity. Upon closure of the plant, we expect an annual benefitto cost of goods sold of approximately $16 million. This repre-sents lower overhead and other fixed manufacturing expensesas the production moves to other existing Caterpillar locations.A total charge of $30 million was recognized for the closing andcomprised the following:

● $16 million for write-downs of land, buildings and equip-ment to fair market value as determined by third-partyappraisers.

● $10 million of separation costs for termination of 495employees at the Shrewsbury plant. These benefits werecommunicated to impacted employees in December.

● Exit costs of $4 million associated with closing the facility.In December 2001, we announced plans to reduce U.S. salaried

and management employment by 433 people at selected businessunits during the first half of 2002. These reductions are beingmade to reduce costs and improve efficiencies in support of ourlong-term growth and profitability goals. We expect this reductionto be achieved through voluntary early retirements but if the reduc-tion goal is not met, we will use involuntary separations. The chargeof $34 million for this program reflects the cost of retirementincentives. We expect lower annual labor costs of approximately$35 million after completion of the employment reduction.

Other unusual charges of $8 million were for write-downs oftwo manufacturing buildings, one at our Decatur, Illinois, facilityand one at our Kiel, Germany, facility.

LIQUIDITY & CAPITAL RESOURCES

Sources of fundsThe company generates its capital resources primarily throughoperations. Consolidated operating cash flow was $2.37 billionfor 2002, compared with $1.99 billion for 2001. The increase isprimarily the result of concerted efforts to reduce inventory andother working capital in response to the current economic environ-ment. We anticipate that the majority of future capital resourcerequirements will be funded by operating cash flow, which is largelysourced from profits. See our Outlook beginning on Page A-42.

Total debt as of December 31, 2002 was $17.7 billion, an increaseof $1.08 billion from year-end 2001. Debt related to Machineryand Engines decreased $59 million, due to improved operatingcash flow and lower capital expenditures. Debt related toFinancial Products increased $1.14 billion due to portfolio growthat Cat Financial. We have a global credit facility of $4.55 bil-lion available to both Machinery and Engines and Cat Financialto support commercial paper programs. Cat Financial may useup to 90 percent of the available facility subject to a maximumdebt to equity and a minimum interest coverage ratio. Machineryand Engines may use up to 100 percent of the available facilitysubject to a minimum level of net worth. Based on these restric-tions, and the allocation decisions of available credit made bymanagement, the portion of the facility available to Cat Financialat December 31, 2002, was $3.95 billion. The facility is comprisedof two components, $2,425 million expiring in September 2003and $2,125 million expiring in September 2006. The facility expir-ing in September 2003 has a provision which allows Caterpillarto obtain a one-year loan in September 2003 that matures in

September 2004. Our total credit commitments as of December 31,2002 were:

(Millions of dollars)

Machinery FinancialConsolidated and Engines Products_________ _________ _______

Credit lines available:Global credit facility. . . . . . . . . . . . . . $4,550 $4,550 $3,950Other external . . . . . . . . . . . . . . . . . . . . 1,353 542 811Intercompany. . . . . . . . . . . . . . . . . . . . . — 500 826_____ _____ _____

Total credit lines available . . . . . . . . . 5,903 5,592 5,587Utilized credit. . . . . . . . . . . . . . . . . . . . . . . 238 64 174_____ _____ _____Unused credit . . . . . . . . . . . . . . . . . . . . . . $5,665 $5,528 $5,413_____ _____ __________ _____ _____

We also generate funding through the securitization of receiv-ables. In 2002, we generated $1,696 million and $641 millionof capital resources from the securitization of trade and financereceivables, respectively. As of December 31, 2002, we had tradeand finance receivables of $2,904 million and $13,462 million,respectively.

We do not generate material funding through structured financetransactions.

Committed fundsThe company has committed cash outflow related to long-termdebt, operating lease agreements, unconditional purchase obli-gations and other contractual obligations. Minimum paymentsfor these long-term obligations are:

(Millions of dollars)After

2003 2004 2005 2006 2007 2007 Total_____ _____ _____ _____ _____ _____ ______Long-Term

Debt . . . . . . . . . $ 3,912 $ 2,781 $1,492 $ 1,212 $ 1,022 $ 5,089 $15,508Operating

Leases. . . . . . . 185 154 102 72 53 300 866Other

Long-TermObligations. . 64 66 56 53 52 115 406

UnconditionalPurchaseObligations. . 62 64 64 52 24 103 369_____ _____ _____ _____ _____ _____ ______

TotalContractualObligations. . $ 4,223 $ 3,065 $1,714 $ 1,389 $ 1,151 $ 5,607 $17,149_____ _____ _____ _____ _____ _____ ___________ _____ _____ _____ _____ _____ ______

We did not have contingent liabilities with more than a remotechance of occurrence at December 31, 2002.

Machinery and EnginesOperating cash flow was $1.70 billion for 2002, compared with$1.51 billion for 2001. The improvement came mainly fromfocused efforts to reduce inventory and working capital require-ments during 2002. Capital expenditures, excluding equipmentleased to others, during 2002 were $693 million, a decrease of$378 million from 2001 due to tight controls on spending. OnApril 23, 2002, $250 million of 40-year debt, priced at 6.95 per-cent, was sold. The proceeds from the offering were used forgeneral corporate purposes.

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Financial ProductsOperating cash flow was $649 million for 2002, compared with$590 million for 2001. The increase was primarily due to improvedcash from profit before depreciation and amortization for 2002.Cash used to purchase equipment leased to others was $1.04 bil-lion during 2002 compared to $830 million for 2001. In addi-tion, net cash used for finance receivables was $1.16 billion for2002, compared to $.8 billion for 2001. At December 31, 2002,finance receivables past due over 30 days were 3.5 percent, com-pared with 3.9 percent at the end of 2001.

Financial Products debt was $13.96 billion at December 31,2002, an increase of $1.14 billion from December 31, 2001, and pri-marily comprised $9.95 billion of medium-term notes, $174 millionof short-term notes payable to banks, $32 million of long-termnotes payable to banks, $38 million of loans from a company-owned partnership, $255 million of money market funds and$3.50 billion of commercial paper. During the second quarter of2001, $500 million of five-year debt, priced at 5.95 percent, wassold. The proceeds from the offering were used for general cor-porate purposes and to lower overall debt costs. The ratio of debtto equity of Cat Financial was 7.8:1 at December 31, 2002, com-pared with 7.7:1 at December 31, 2001.

Dividends paid per common shareQuarter 2002 2001 2000First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .350 $ .340 $ .325Second. . . . . . . . . . . . . . . . . . . . . . . . . . . . .350 .340 .325Third. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .350 .350 .340Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . .350 .350 .340______ ______ ______

$1.400 $1.380 $1.330______ ______ ____________ ______ ______

CRITICAL ACCOUNTING POLICIESThe preparation of financial statements in conformity with gen-erally accepted accounting principles requires management tomake estimates and assumptions that affect reported amounts.The more significant estimates include: residual values for leasedassets, fair market values for goodwill impairment tests, impair-ment of available for sale securities, and reserves for warranty,product liability and insurance losses, postemployment benefits,post-sale discounts, credit losses and certain unusual charges.We use the following methods and assumptions in determiningour estimates:

Residual values for leased assets — Determined based on theproduct, specifications, application and hours of usage. Eachproduct has its own model for evaluation that includes marketvalue cycles and forecasts. Consideration is also given to thenumber of machines that will be returned from lease during agiven time frame.

Fair market values for goodwill impairment tests — Deter-mined for each reporting unit by discounting projected cash flowfor the upcoming five years and adding a year-five residual valuebased upon a market Earnings Before Interest, Taxes, Deprecia-tion and Amortization (EBITDA) multiple.

Impairment of available-for-sale securities — Securities arereviewed monthly to identify market values below cost of 20 per-cent or more. If a decline for a debt security is in excess of 20 per-cent for 6 months, the investment is evaluated to determine if the

decline is due to general declines in the marketplace or if theinvestment has been impaired and should be written down tomarket value pursuant to SFAS 115. After the 6-month period,debt securities with declines from cost in excess of 20 percent areevaluated monthly for impairment. For equity securities, if adecline from cost of 20 percent or more continues for a 12-monthperiod, an other than temporary impairment is recognized with-out continued analysis.

Warranty reserve — Determined by applying historical claimrate experience to the current field population and dealer inventory.Generally, historical claim rates are developed using a 12-monthrolling average of actual warranty expense. These rates are appliedto the field population and dealer inventory to determine the reserve.

Product liability and insurance loss reserve — Determinedbased upon reported claims in process of settlement and actuar-ial estimates for losses incurred but not reported.

Postemployment benefit reserve — Determined in accordancewith SFAS 87, 106 and 112 using the assumptions detailed inNote 11 to the Consolidated Financial Statements.

Post-sale discount reserve — The company extends numerousmerchandising programs that provide discounts to dealers asproducts are sold to end users. The reserve is determined basedon historical data adjusted for known changes in merchandisingprograms.

Credit loss reserve — Determined by applying historical creditloss experience to the current receivable portfolio with consid-eration given to the condition of the economy and trends in pastdue accounts.

Unusual charge reserve — Determined in accordance with theappropriate accounting guidance depending on the facts and cir-cumstances surrounding the situation. 2001 unusual charges dis-cussed in Note 24 on Page A-27 to the Consolidated FinancialStatements were estimated in accordance with SFAS 5 and 121and EITF 94-3.

We have incorporated many years of historical data into thedetermination of each of these estimates. We have a proven his-tory of using accurate estimates and sound assumptions to calcu-late and record appropriate reserves and residual values.

EMPLOYMENTAt December 31, 2002, Caterpillar’s worldwide employmentwas 68,990 compared with 72,004 one year ago. The companyreduced employment by 3,457 or about 5 percent during 2002before the impact of acquisitions, which added 443 people.

Full-Time Employees at Year End2002 2001 2000

Inside U.S. . . . . . . . . . . . . . . . . . . . . . . . . 36,463 38,664 37,660Outside U.S. . . . . . . . . . . . . . . . . . . . . . . 32,527 33,340 30,780

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,990 72,004 68,440By Region:

North America. . . . . . . . . . . . . . . . . 36,667 38,879 37,870EAME.. . . . . . . . . . . . . . . . . . . . . . . . . 21,302 22,246 21,880Latin America . . . . . . . . . . . . . . . . . 7,143 7,012 6,186Asia/Pacific . . . . . . . . . . . . . . . . . . . . 3,878 3,867 2,504

Total . . . . . . . . . . . . . . . . . . . . . . . . 68,990 72,004 68,440__________________________________________


A-40

OTHER MATTERS

ENVIRONMENTAL AND LEGAL MATTERSThe company is regulated by federal, state and international envi-ronmental laws governing our use of substances and control ofemissions in all our operations. Compliance with these existinglaws has not had a material impact on our capital expenditures,earnings or competitive position.

We are cleaning up hazardous waste at a number of locations,often with other companies, pursuant to federal and state laws.When it is likely we will pay clean-up costs at a site and thosecosts can be estimated, the costs are charged against our earnings.In making that estimate, we do not consider amounts expectedto be recovered from insurance companies and others.

The amount set aside for environmental cleanup is not mate-rial and is included in “Accrued expenses” in Statement 3. If arange of liability estimates is available on a particular site, weaccrue the lower end of that range.

We cannot estimate costs on sites in the very early stages ofcleanup. Currently, we have five sites in the very early stages ofcleanup, and there is no more than a remote chance that a mate-rial amount for cleanup will be required.

Pursuant to a consent decree Caterpillar entered with theUnited States Environmental Protection Agency (EPA), the com-pany was required to meet certain emission standards by October2002. The decree provides that if the manufacturers were unableto meet the standards at that time they would be required to paya non-conformance penalty (NCP) on each engine sold that didnot meet the standard. The amount of the NCP would be basedon how close to meeting the standard the engine came — the moreout of compliance the higher the penalty. The company beganshipping lower emission engines in October 2002 as a bridgeuntil fully compliant Advanced Combustion Emission ReductionTechnology (ACERT™) engines are introduced in 2003.

Our expense for NCPs was $40 million in 2002. This amountwas based on levels we believe the engines will perform whentested. The actual NCP amount will not be known until final test-ing with the EPA is completed for all models during 2003. Asidefrom customary research and development expenses, the netimpact of producing and selling bridge engines negatively impacted2002 financial results by $24 million ($17 million after tax or about5 cents per share) as NCPs, product cost increases and ramp-upproduction costs were partially offset by price increases for theseengines. Because of increased volumes in 2003, NCP expensewill be significantly higher than in 2002, however, we expect thenet unfavorable impact of producing and selling bridge enginesto be no more than 2002. We do not anticipate paying NCPsbeyond 2003.

The consent decree also provided the ability to “bank” creditsprior to October 2002 that could be used to offset non-conformingengines produced after January 1, 2003. That is, if a company wasable to produce and sell engines that were below the applicablestandard prior to October 2002, then the company could applythe emission credits created by those engines to engines pro-duced after January 1, 2003 that do not meet the consent decreestandard. For example, an engine produced and sold prior toOctober 2002 that produced 3.5 grams of NOx as compared to

4.0 gram standard would create a 0.5 gram credit. This creditwould be “banked” to be used to offset the NOx deficiency ofan engine produced after January 1, 2003 that did not meet theconsent decree standard. Given this scenario, a company couldproduce and sell a 3.0 gram engine in 2003 without paying anNCP even though the engine exceeds the 2.5 gram standard.

We produced and sold 70,399 mid-range engines and 958 heavy-duty engines prior to October 2002 which yielded emissions belowthe applicable standard for that period, resulting in 20,987.8 Mgof mid-range banked credits and 1,230.2 Mg of heavy-duty bankedcredits. We do not expect to pay any NCPs on our medium-dutyengines in 2003 due to these banked credits. Of the approximately25,800, non-conforming heavy-duty engines we anticipate build-ing after January 1, 2003, credits are expected to offset the NCPson approximately 3,000 of these units.

In addition to the above, the consent decree required Caterpillarto pay a fine of $25 million, which was expensed in 1998, and tomake investments totaling $35 million in environmental-relatedprojects by July 2007. Qualifying investments totaling approxi-mately $10 million were made in 2002. Total qualifying invest-ments to date for these projects is approximately $21 million.

On January 16, 2002, Caterpillar commenced an action againstNavistar International Transportation Corporation and InternationalTruck & Engine Corporation (Navistar). Caterpillar seeks a declar-atory judgment upholding a long-term purchase contract plusdamages arising from Navistar’s alleged breach of contract. OnJanuary 22, 2003, Caterpillar filed its First Amended Complaintto add four additional defendants and to add claims alleging thattwo of the new defendants colluded with Navistar to utilize tech-nology misappropriated from Caterpillar. At December 31, 2002,the past due receivable from Navistar related to this case was$104 million. On January 17, 2002, Navistar commenced anaction against Caterpillar that alleges we breached various aspectsof the long-term purchase contract. On April 2, 2002, the Courtgranted Caterpillar’s Motion for Involuntary Dismissal of thisaction; Navistar subsequently asserted its claims as counterclaimsin the action Caterpillar filed in Peoria. We believe Navistar’sclaims are without merit, and resolution of these matters will nothave a material impact on our financial statements.

On May 7, 2002, International Truck and Engine Corporationcommenced an action against Caterpillar in the Circuit Court ofDuPage County, Illinois that alleges Caterpillar breached variousaspects of a long-term agreement term sheet. In its third amendedcomplaint, International seeks a declaration from the court thatthe term sheet constitutes a legally binding contract for the saleof heavy-duty engines at specified prices through the end of 2006,alleges that Caterpillar breached the term sheet by raising certainprices effective October 1, 2002, and also alleges that Caterpillarbreached an obligation to negotiate a comprehensive long-termagreement referenced in the term sheet. International furtherclaims that Caterpillar improperly restricted the supply of heavy-duty engines to International from June through September 2002.International seeks damages and injunctive relief. Caterpillarfiled an answer denying International’s claims and has filed acounterclaim seeking a declaration that the term sheet has effec-tively been terminated. Caterpillar denies International’s claimsand will vigorously contest them. The company further believesthat final resolution of this matter will not have a material impact

Caterpillar Inc.

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Postretirement Benefit Plan Actuarial Assumptions Sensitivity

Following are the effects of a one percentage-point change in our primary pension and other postretirement benefit actuarial assump-tions on 2002 pension and other postretirement benefits costs and obligations:

2002 Benefit Cost Year-end Benefit ObligationOne percentage- One percentage- One percentage- One percentage-

(Millions of dollars) point increase point decrease point increase point decrease

Pension benefits:Assumed discount rate . . . . . . . . . . . . . . . . . . . . $ (33) $ 26 $ (991) $1,146Expected rate of compensation

increase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 (25) 222 (202)Expected long-term rate of return

on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (93) 93 — —

Other postretirement benefits:Assumed discount rate . . . . . . . . . . . . . . . . . . . . (17) 28 (434) 485Expected rate of compensation

increase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (2) 12 (12)Expected long-term rate of return

on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) 12 — —Assumed health care cost trend rate. . . . . . 49 (31) 272 (230)

on our financial statements. This matter is not related to the breachof contract action brought by Caterpillar against Internationalcurrently pending in the Circuit Court of Peoria County, Illinois.

POSTRETIREMENT BENEFITSIn 2002 we recognized a net pension benefit of $73 million com-pared with a benefit of $163 million in 2001. The decrease wasprimarily a result of continued poor performance of the equitymarkets and lower than expected long-term returns on pensionplan assets. SFAS 87, “Employers’ Accounting for Pensions”requires companies to use an expected long-term rate of returnfor computing current year pension expense. Differences betweenthe actual and expected returns are amortized into future earningsas actuarial gains and losses. At the end of 2002, unrecognizedactuarial losses of $2.56 billion primarily reflect lower thanexpected returns on our pension plan assets.

Other postretirement benefit expense was $240 million in 2002,up $3 million from 2001. An increase resulting from severalunfavorable items including inflation on health care costs andlower actual return on plan assets was almost entirely offset bychanges to our U.S. benefit plans implemented during secondquarter 2002. These changes include an increase in retiree costsharing of health care benefits, elimination of company paymentsfor Medicare part B premiums and significant reductions inretiree life insurance. In total, these changes lowered our exist-ing benefit obligation by approximately $475 million, which willbe amortized into earnings over seven years (the average remain-ing service period of employees affected by the plan changes).In addition to this amortization, our ongoing annual expense willdecrease approximately $45 million from the plan changes. Abenefit of $75 million reflecting the partial year impact of theplan changes (representing both the amortization and ongoingimpact of the changes) was recognized in 2002. Unrecognized

actuarial losses for other postretirement plans were $976 millionat the end of 2002. These losses reflect lower than expected planasset returns, higher than expected benefit costs, a decrease inthe assumed discount rate and an increase in expected healthcare inflation. These losses will be amortized into future earningsin accordance with SFAS 106, “Employer’s Accounting forPostretirement Benefits Other than Pensions.”

The unrecognized actuarial losses will be impacted in futureperiods by actual asset returns, actual health care inflation, dis-count rate changes and other factors that impact pension andother postretirement benefit expenses.

SFAS 87 requires the recognition of an Additional MinimumLiability if the market value of plan assets is less than the accu-mulated benefit obligation at the end of the plan year. Based onthese values, the company increased the Additional MinimumLiability by $892 million in the fourth quarter of 2002. This resultedin a decrease in Accumulated Other Comprehensive Income (acomponent of Shareholder’s Equity on the Statement of FinancialPosition) of $610 million after tax. During 2002, the companymade cash contributions of $135 million to its U.S. defined ben-efit pension plans, which make up about 85 percent of the com-pany’s total pension liability. The company continues to haveadequate liquidity resources to fund plans, as it deems neces-sary. Future changes to the Additional Minimum Liability willbe dependent on several factors including actual returns on ourpension plan assets, company contributions, benefit plan changesand our assumed discount rate.

Actuarial assumptions have a significant impact on both pen-sion and other postretirement benefit expenses. The effect of aone-percentage point change in our primary actuarial assump-tions on 2002 benefit costs and year-end obligations is includedin the table below.


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The assumed discount rate is used to discount future benefitobligations back to today’s dollars. The U.S. discount rate isbased on the Moody’s Aa bond yield as of our measurement date,November 30. A similar process is used to determine the assumeddiscount rate for our non-U.S. pension plans. The discount ratesused to calculate 2002 benefit plan expense were 7.3 percent forU.S. plans and 5.8 percent for non-U.S. plans. The discount ratesfor 2003 will be 7.0 percent for U.S. plans and 5.4 percent fornon-U.S. plans.

The expected rate of compensation increase is used to developbenefit obligations using projected pay at retirement. It representsaverage long-term salary increases. The 2002 rate was 4.0 percentfor U.S. benefit plans and 3.2 percent for non-U.S. pension plans.

Our U.S. expected long-term rate of return on plan assets isbased on our estimate of long-term passive returns for equitiesand fixed income securities weighted by the allocation of ourpension assets. Based on historical performance, we add 1 percentto the passive returns due to our active management. A similarprocess is used to determine this rate for our non-U.S. pensionplans. The expected long-term rates of return used to calculate2002 benefit plan expense were 9.8 percent for U.S. plans and7.6 percent for non-U.S. plans. The expected long-term rates ofreturn for 2003 will be 9.0 percent for U.S. plans and 7.1 percentfor non-U.S. plans.

The assumed health care trend rate represents the rate at whichhealth care costs are assumed to increase. To calculate 2002 ben-efit expense, we assumed an increase of 10.6 percent for 2002.This rate was assumed to decrease gradually to the ultimatehealth care trend rate of 4.5 percent in 2009. This rate represents2.5 percent general inflation plus 2.0 percent additional healthcare inflation. Based on our recent expenses and our forecast ofchanges, we expect an increase of 9.0 percent during 2003 withno change to the ultimate trend rate.

SENSITIVITY

Foreign Exchange Rate SensitivityBased on the anticipated and firmly committed cash inflow andoutflow for our Machinery and Engines operations for the next12 months and the foreign currency derivative instruments inplace at year end, a hypothetical 10 percent weakening of theU.S. dollar relative to all other currencies would adversely affectour expected 2003 cash flow for our Machinery and Engines opera-tions by $39 million. Last year, similar assumptions and calcula-tions yielded a potential $62 million adverse impact on 2002 cashflow. We determine our net exposures by calculating the differ-ence in cash inflows and outflows by currency and adding orsubtracting outstanding foreign currency derivative instruments.We multiply these net amounts by 10 percent to determine thesensitivity.

Since our Policy for Financial Products operations is to hedgethe foreign exchange risk when the currency of our debt portfoliodoes not match the currency of our receivable portfolio, a 10 per-cent change in the value of the U.S. dollar relative to all other cur-rencies would not have a material effect on our consolidatedfinancial position, results of operations or cash flow. Neither ourPolicy nor the effect of a 10 percent change in the value of theU.S. dollar has changed from that reported at the end of last year.

The effect of the hypothetical change in exchange rates ignoresthe effect this movement may have on other variables, includingcompetitive risk. If it were possible to quantify this competitiveimpact, the results would probably be different from the sensi-tivity effects shown above. In addition, it is unlikely that all cur-rencies would uniformly strengthen or weaken relative to theU.S. dollar. In reality, some currencies may weaken while oth-ers may strengthen.

Interest Rate Sensitivity

For our Machinery and Engines operations, we have the optionto use interest rate swaps to lower the cost of borrowed funds byattaching fixed-to-floating interest rate swaps to fixed-rate debt.However, we currently do not have any interest rate swaps. A hypo-thetical 100 basis point adverse move (increase) in interest ratesalong the entire interest rate yield curve would adversely affect2003 pretax earnings of Machinery and Engines by $2 million.Last year, similar assumptions and calculations yielded a potential$3 million adverse impact on 2002 pretax earnings. This effectis caused by the interest rate fluctuations on our short-term debt.

For our Financial Products operations, we use interest ratederivative instruments primarily to meet our match funding objec-tives and strategies. A hypothetical 100 basis point adverse move(increase) in interest rates along the entire interest rate yield curvewould adversely affect the 2003 pretax earnings of FinancialProducts by $15 million. Last year, similar assumptions and cal-culations yielded a potential $15 million adverse impact on 2002pretax earnings. To estimate the impact of interest rate sensitivityon our income, we compute the difference in baseline and sen-sitized interest expense over the next 12 months. We determinethe baseline interest expense by applying a market interest rateto the unmatched portion of our debt portfolio. The unmatched por-tion of our portfolio is an estimate of fixed-rate assets funded byfloating rate liabilities. We incorporate the effects of interest rateswap agreements in the estimate of our unmatched portfolio. Wedetermine the sensitized interest expense by adding 100 basispoints to the market interest rate applied to baseline interestexpense and apply this rate to the unmatched portfolio. Our anal-ysis assumes no new fixed-rate assets were extended and no fur-ther action was taken to alter our current interest rate sensitivity.

The effect of the hypothetical change in interest rates ignoresthe effect this movement may have on other variables includingchanges in actual sales volumes that could be indirectly attributedto changes in interest rates. The actions that management wouldtake in response to such a change are also ignored. If it were pos-sible to quantify this impact, the results could well be differentthan the sensitivity effects shown above.

OUTLOOK

Economic and Industry SummaryWorldwide economic and geopolitical uncertainties remained atrelatively elevated levels in the early weeks of 2003. We expectthis will dampen the economic recovery in the first half of 2003,but growth is expected to accelerate in the second half, leadingto worldwide growth of about 3 percent for the year as a whole.In this environment, industry opportunity is expected to be aboutthe same as 2002. Our outlook is based on and subject to the

following economic and business condition assumptions: (1) thegeopolitical tensions in the Middle East remain high, but do notdegenerate into a major lengthy armed conflict, (2) the benefitsfrom lower European interest rates offset fiscal tightening in sev-eral major European countries, (3) the U.S. Congress approvesin early 2003 about $30 billion in current fiscal year transporta-tion funding and additional fiscal stimulus measures are passedby the end of the second quarter and (4) investor confidenceimproves as corporate earnings grow and trust is restored in thereliability of corporate reporting and oversight.

North AmericaGeopolitical and federal policy uncertainties in early 2003 areexpected to dampen the strength of the first-half economic recov-ery. We assume these uncertainties will diminish and becomeless of a drag on growth in the second half of 2003. For the yearas a whole, we expect economic growth of about 3 percent, sup-ported by low interest rates and fiscal stimulus policies. The U.S.Congress is expected to pass a large fiscal stimulus package inthe first half of 2003. The package, combined with the positiveimpact of previously enacted federal stimulus measures, isexpected to more than offset state budget cutbacks, with mostof the positive impact in the second half of the year. In addition,improved corporate earnings and cash flows, more accommo-dating credit conditions and a return to more normal commer-cial insurance coverage are also expected to provide support forstronger business capital spending in the second half of 2003.Construction activity is expected to be about flat, while indus-trial and mining activity is expected to be up about 3 percent.Industry sales of construction, industrial and mining machineryare expected to be about flat. Industry demand for reciprocatingand turbine engines is expected to be down about 5 percent.

EAMEIn EAME, we expect economic growth in Europe of about 2 per-cent, and about 5 percent growth in the CIS, Africa and theMiddle East. While a recovery in Europe is expected, it will berestrained by a stronger euro and ongoing fiscal restraint in sev-eral major industrial countries. In Africa and the Middle East,oil exporters and precious metal producers are expected to ben-efit from good price levels, whereas most other commodity pricesare expected to remain weak. We expect the CIS to grow at asolid rate, driven mainly by continued strong expansion of the oiland gas industry. Machine industry sales in EAME are expectedto be about flat, while engine industry sales are also expected tobe about flat.

Latin AmericaMarket conditions in Latin America are expected to be mixed.We expect overall economic growth rates in Mexico and Argentinato improve, leading to higher industry sales. Industry sales inPeru are expected to be about flat. Relatively slow growth inBrazil and Chile and continued political instability in Venezuelaare expected to lead to lower industry machine sales in thesemarkets. For Latin America in total, machine and engine indus-try sales are expected to be down about 10 percent.

Asia/PacificWe expect good overall economic growth in the Asia/Pacificregion (excluding Japan) based on moderate growth in Australiaand continued good growth in the developing economies, par-ticularly southeast Asia, China and India. In Japan, economicand business conditions are expected to continue to be difficult,and machine industry sales are projected to be about flat at cycli-cally depressed levels. Industry machine sales in the Asia/Pacificregion are expected to be up about 10 percent, while engine andturbine industry sales are projected to be down about 5 percent.

Company SummaryCompany sales and revenues are expected to be about the sameas 2002. Company sales in EAME are projected to be up about4 percent, while company sales into Asia/Pacific are expectedto be up about 2 percent. In North America, company sales areexpected to be down about 3 percent, while company sales inLatin America are expected to be down about 10 percent.

Financial Products revenues are expected to increase approx-imately 10 percent, primarily driven by Cat Financial’s recordportfolio additions in 2002.

We anticipate improved operational results will offset mostof the $300 million or approximately 60 cents per share of higherretiree pension, health care and related benefit costs. Therefore,despite flat sales and revenues and these increased costs, profitshould be down only about 5 percent compared to 2002.

* * *The information included in the Outlook section is forward lookingand involves risks and uncertainties that could significantly affectexpected results. A discussion of these risks and uncertainties iscontained in Form 8-K filed with the Securities & Exchange Com-mission (SEC) on January 23, 2003.

MANAGEMENT’S DISCUSSION AND ANALYSIS �

Caterpillar Inc.

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SUPPLEMENTAL STOCKHOLDER INFORMATION

Stockholder Services:Stock Transfer AgentMellon Investor ServicesP.O. Box 3315South Hackensack, NJ 07606-3315phone: (866) 203-6622 (United States and Canada)

(201) 329-8660 (Outside United States and Canada)hearing impaired:

(800) 231-5469 (United States and Canada)(201) 329-8354 (Outside United States and Canada)

Internet home page: www.melloninvestor.com

Caterpillar Assistant SecretaryLaurie J. HuxtableCaterpillar Inc.100 N.E. Adams StreetPeoria, IL 61629-7310phone: (309) 675-4619fax: (309) 675-6620e-mail: [email protected]

Stock Purchase Plan:Current stockholders and other interested investors may purchaseCaterpillar Inc. common stock directly through the Investor ServicesProgram sponsored and administered by our Transfer Agent.

Current stockholders can get more information on the programfrom our Transfer Agent using the contact information providedabove. Non-stockholders can request program materials by calling:(800) 842-7629 (United States and Canada) or (201) 329-8660(outside United States and Canada). The Investor Services Programmaterials are available online from Mellon’s website or linkedfrom www.CAT.com/dspp.

Investor Relations:Institutional analysts, portfolio managers and representatives offinancial institutions seeking additional information about thecompany should contact:

Director of Investor RelationsNancy L. SnowdenCaterpillar Inc.100 N.E. Adams Street, Peoria, IL 61629-5310phone: (309) 675-4549fax: (309) 675-4457e-mail: [email protected] website: www.CAT.com/investor

Common Stock (NYSE: CAT)Listing Information: Caterpillar common stock is listed on theNew York, Pacific and Chicago stock exchanges in the United States,

and on stock exchanges in Belgium, France, Germany, Great Britainand Switzerland.

Price Ranges: Quarterly price ranges of Caterpillar commonstock on the New York Stock Exchange, the principal market inwhich the stock is traded, were:

2002 2001_______________ _______________Quarter High Low High Low______ ____ ____ ____ ____First . . . . . . . . . . . . . . . . . . 59.99 46.75 49.63 39.75Second . . . . . . . . . . . . . . . 59.62 45.90 56.81 41.50Third . . . . . . . . . . . . . . . . . 49.40 36.33 55.72 40.35Fourth . . . . . . . . . . . . . . . . 50.84 33.75 53.21 43.35

Number of Stockholders: Stockholders of record at year-endtotaled 38,200, compared with 36,339 at the end of 2001. Approxi-mately 67% of our issued shares are held by institutions andbanks, 25% by individuals and 8% by Caterpillar benefit plans.

Employees’ investment and profit-sharing plans acquired5,991,908 shares of Caterpillar stock in 2002. Investment plans,for which membership is voluntary, held 29,601,547 shares foremployee accounts at 2002 year end. Profit-sharing plans, inwhich membership is automatic for most U.S. and Canadianemployees in eligible categories, held 445,467 shares at 2002year end.

Company Publications:Current information:

● phone our Information Hotline — (800) 228-7717(United States and Canada) or (858) 244-2080 (outsideUnited States and Canada) to request company publica-tions by mail, listen to a summary of Caterpillar’s latestfinancial results and current outlook or to request a copyof results by fax or mail.

● request, view or download materials online or register fore-mail alerts by visiting www.CAT.com/materialsrequest

Historical information:

● view/download on-line at www.CAT.com/historical

Annual Meeting:On Wednesday, April 9, 2003, at 1:30 p.m. Central Time, theannual meeting of stockholders will be held at the Northern TrustCorporation, Chicago, Illinois. Requests for proxies are beingmailed to stockholders with this report on or about March 3, 2003.

Internet:Visit us on the Internet at www.CAT.comInformation contained on our website is not incorporated by ref-erence into this document.

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Note: All director/officer information is as of December 31, 2002, except as noted.

1Member of Audit Committee (David R. Goode, chairman)2Member of Compensation Committee (William A. Osborn, chairman)3Member of Nominating & Governance Committee (John T. Dillon, chairman)4Member of Public Policy Committee (John R. Brazil, chairman)5Effective January 1, 2003.6Retired effective December 31, 2002.7Effective May 1, 2002.8Effective December 1, 2002.

OFFICERSGlen A. Barton Chairman and CEOVito H. Baumgartner Group PresidentDouglas R. Oberhelman Group PresidentJames W. Owens Group PresidentGerald L. Shaheen Group PresidentRichard L. Thompson Group PresidentAli M. Bahaj7 Vice PresidentSidney C. Banwart Vice PresidentMichael J. Baunton Vice PresidentJames S. Beard Vice PresidentRichard A. Benson Vice PresidentJames B. Buda Vice President,

General Counsel and SecretaryRodney L. Bussell Vice PresidentThomas A. Gales Vice PresidentStephen A. Gosselin7 Vice PresidentDonald M. Ings Vice PresidentRichard P. Lavin Vice PresidentStuart L. Levenick Vice PresidentRobert R. Macier Vice PresidentDavid A. McKie6 Vice President

F. Lynn McPheeters Vice President,Chief Financial Officer

Daniel M. Murphy Vice PresidentGerald Palmer Vice PresidentJames J. Parker Vice PresidentEdward J. Rapp Vice PresidentAlan J. Rassi6 Vice PresidentChristiano V. Schena8 Vice PresidentWilliam F. Springer7 Vice PresidentGary A. Stroup Vice PresidentGerard R. Vittecoq Vice PresidentSherril K. West Vice PresidentDonald G. Western Vice PresidentSteven H. Wunning Vice PresidentDavid B. Burritt8 ControllerKenneth J. Zika6 ControllerKevin E. Colgan TreasurerRobin D. Beran Assistant TreasurerTinkie E. Demmin Assistant SecretaryLaurie J. Huxtable Assistant Secretary

DIRECTORS

Lilyan H. Affinito1,3 Former Vice Chairman, Maxxam Group Inc.Glen A. Barton Chairman and CEO, Caterpillar Inc.W. Frank Blount1,3 Chairman and CEO, JI Ventures, Inc.John R. Brazil2,4 President, Trinity UniversityJohn T. Dillon1,3 Chairman and CEO, International PaperEugene V. Fife1,2 Managing Principal, Vawter Capital LLCGail D. Fosler5 Senior Vice President and Chief Economist, The Conference BoardJuan Gallardo1,2 Chairman, Grupo Embotelladoras Unidas S.A. de C.V.David R. Goode1,2 Chairman, President and CEO, Norfolk Southern CorporationPeter A. Magowan2,4 President and Managing General Partner, San Francisco GiantsWilliam A. Osborn1,2 Chairman and CEO, Northern Trust Corporation and The Northern Trust CompanyGordon R. Parker3,4 Former Chairman, Newmont Mining CorporationCharles D. Powell2,4 Chairman, Sagitta Asset Management LimitedJoshua I. Smith3,4 Chairman and Managing Partner, The Coaching Group LLCClayton K. Yeutter3,4,6 Of Counsel to Hogan & Hartson, Washington, D.C.

DIRECTORS AND OFFICERS

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• 2002 General and Financial Information (Proxy Appendix)

Economy & Finance

Transcript of • 2002 General and Financial Information (Proxy Appendix)